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Chemring benefiting from defence spending renewal

The group is looking to the US for future growth
June 27, 2017

Defence companies tend to do well in dangerous times as governments ramp-up spending to combat new or gathering security threats. Naturally, then, in today's increasingly volatile environment, munitions and technology supplier Chemring (CHG) has clocked up solid growth in its latest half-year results. This is reflected in a swelling top-line and improved margins. Underlying operating profit jumped to £17.2m from £3.8m a year earlier, once you disregard £18.1m in exceptional charges, largely related to discontinued operations and other restructuring measures for the US and UK businesses. The group has also reinstated its half-year dividend, which was scrapped in the wake of last year's profit warning.

IC TIP: Hold at 189p

A year on and growth prospects are improving in the face of heightened global security anxieties. Chemring warns that "nations [will] increasingly have to prepare for nuclear, conventional and asymmetric threats, including chemical and biological attacks". This is expected to bolster defence spending in the key US market, but also in some hitherto recalcitrant NATO member states in Western Europe. Chief executive Michael Flowers said the US offered the best growth potential in the coming year, underlined by recent proposals from the US House and Senate Armed Services Committee to pitch a defence budget of $640bn (£502bn) for 2018, a $37bn increase over the Trump administration's original request. "US programmes tend to have an extra zero," Mr Flowers added. He believes the group's work on flares for F35 jets, chemical and biological detection and wheel-based husky-mounted detection systems - a ground penetrating radar used to detect landmines and improvised explosive devices - all present major opportunities.

The order book declined by £37m from the October year-end to £556m, but actual order intake increased appreciably from the comparative period in 2015-16. Around £260m of that figure is expected to be recognised as revenue during the second half, representing cover of approximately 85 per cent.

Analysts at Investec are forecasting adjusted profit before tax of £39.7m for the year to the end of October 2017, giving EPS of 11.1p (from £34m and 10.1p in 2016).

 

CHEMRING (CHG)
ORD PRICE:189pMARKET VALUE:£528m
TOUCH:189-189.5p12-MONTH HIGH:208pLOW: 107p
DIVIDEND YIELD:1.2%PE RATIO:29
NET ASSET VALUE:146p*NET DEBT:28%

Half-yearto 30 AprTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2016180-16.8-5.30nil
2017250-6.8-1.201.00
% change+39---

Ex-div: 31 Aug

Payment: 15 Sep

*Includes intangible assets of £196m, or 70p a share