ii view: weather holds back defence company Chemring

AGM and first-quarter trading update to 31 January

• Order book up 52% year-over-year to £991 million

Chief executive Michael Ord said:

“Our order book momentum has been maintained with the receipt of several significant orders, demonstrating continued customer confidence in Chemring's market leading products and services.”

• Invest with ii: Open a Stocks & Shares ISA | ISA Investment Ideas | Transfer a Stocks & Shares ISA

ii round-up:

Defence equipment maker Chemring Group (LSE:CHG) today pointed to trading which remains in line with expectations, but performance is now expected to be more second-half weighted given severe winter weather disrupted some operations. 

Against the backdrop of wars in both Ukraine and the Middle East, Chemring’s order book rose to £991 million at the end of January, up from £654 million a year ago. 

Shares in the FTSE 250 company fell 2% in UK trading having come into this latest news up by more than a quarter over the last year. That’s better than a 10% gain for fellow defence contractor QinetiQ Group (LSE:QQ.) although less than gains of 36% and 57% respectively for BAE Systems (LSE:BA.) and Babcock International Group (LSE:BAB).

Chemring’s Countermeasures and Energetics products are used by military aircraft to fool ground-to-air missiles, along with providing cutting-edge raw materials and aircraft safety components. Its sensors and information business supplies products to detect biological and chemical weapons, as well as being used in electronic warfare.

Its Countermeasures and Energetics business had continued to see increasing levels of demand for propellants and energetic materials, including demand for its US based business from commercial space launch providers.

Within its Sensors and Information division, its specialist Roke technology unit, focused on areas such as cyber security, secret cloud, and artificial intelligence, enjoyed strong order intake. That included an additional £10 million order to assist the British Army with its data-led decision-making programme to gain operational advantage.

First-half results to the end of April are due 4 June. 

ii view:

Headquartered in Romsey, Hampshire, Chemring customers range from national defence organisations to security and law enforcement agencies, as well as commercial aerospace markets including space. Employing over 2,500 people, it supplies customers in more than 50 countries. Countermeasures and Energetics generates most of its sale at around three-fifths.

For investors, deferred product deliveries due to bad weather and operational disruption increases pressure on management for a smooth second half performance. Costs for businesses generally remain heightened, an estimated price-to-net asset value above the three-year average may suggest the shares are not good value, while defence expenditure is politically driven and arguably easier to cut than say health or education.

• eyeQ: Rolls-Royce shares – a case study in macro vs micro
• ISA ideas: out-of-form areas pros think will make a comeback
• ii view: Airbus details special dividend following record orders

On the upside, global geopolitical tensions remain high, with Russia not ruling out a second attempt at invading Ukraine capital Kyiv. Both product and geographical diversity exist, its Roke business brings a specialist focus on technology arenas, while its dividend payment has increased consecutively for more than the last five years, giving a forecast dividend yield of around 2%. 

In all, and while Chemring shares may not be the bargain they previously were, ongoing geopolitical tensions and consensus analyst fair value estimate above 400p per share make them interesting. 

Positives: 

• Business type and geographical diversity
• Progressive dividend payment

Negatives:

• Defence is a volatile industry
• Exposure to currency movements

The average rating of stock market analysts:

Buy