What's new
•Third-quarter sales down sharply
•Order book up in past three months
•Full-year outlook maintained
Massive spending cuts both in Europe and the US have caused huge problems for our defence contractors. Chemring (CHG), which relies heavily on conflict weaponry and kit-like ammunition, flares and countermeasures, has had to cope with troop withdrawal from Iraq and Afghanistan, too. That's why revenue was down 14 per cent during the third quarter, to £142.8m, and the order book by 18 per cent to £748m.
Most of the damage was done at the countermeasures division, where sales slumped by almost a third and orders by only a little less. A big contract from the Middle East, first flagged in June, has yet to materialise, although chief executive Mark Papworth remains confident it will be received and delivered by the end of October. Phasing of work on the ground-penetrating radar Husky mounted detection system (HMDS) contract trimmed sales at the larger sensors and electronics unit as well and revenue fell at both the pyrotechnics & munitions and energetic subsystems businesses.
Chemring does, however, appear in better shape than it was three months ago. Indeed, the order book has since risen 7 per cent, Mr Papworth's recovery plan is delivering results and the company is on target to meet market expectations for the full year.
Investec Securities says…
Buy. Trading has been in line with expectations despite the ongoing end-market difficulties. It is highly likely a similar pattern of order intake will exist in 2014, making forecasting challenging, although the recovery plan should at least partially offset the headwinds. We do not make any changes to our forecasts for adjusted pre-tax profit of £60.3m and adjusted EPS of 23.8p (from £70.1m and 28.1p in 2012), but acknowledge the short- and medium-term risks. Chemring must receive the highlighted Middle Eastern contract to meet consensus estimates. We value Chemring at a 5 per cent discount to peers with a target price of 340p.
JPMorgan says…
Overweight. We see a change in management as a catalyst for a self-help programme to drive significant operational improvement and a change in culture. There is clearly significant work to do in order to restore investor confidence and this rehabilitation will take time. But we see the potential for a compelling turnaround story with expectations rebased and a more realistic view on the group's end markets. We do not expect defence market uncertainties to ease in the short term, but see the current valuation capturing these risks. Our price target moves from 300p to 325p following a re-rating of our UK defence peer group.
