Hopes of a defence sector recovery took a turn for the worse after two major contractors issued profit warnings in quick succession. Just one day after Chemring (CHG) announced devastating delays to a key Middle East contract, Meggitt (MGGT) warned that weaker trading meant its profits, too, were likely to fall "meaningfully below" expectations.
Tepid demand across energy and military aviation markets saw Meggitt post 1 per cent organic revenue losses in the third quarter. Lower volumes, coupled with waning appetite for aircraft spare parts and lucrative after-market work, weighed on margins, prompting management to warn that underlying operating profit is likely to be "meaningfully below" consensus estimates of £369m. In response, the group plans to cut 300 jobs.
Chemring's reaction to the delay of a key contract following the cancellation of a big US deal was to ask investors for £90m via a rights issue. Boss Michael Flowers cautioned that the maker of surveillance systems, detectors, flares and bullets was struggling to manage its growing debt pile, having acquired 11 businesses during the recession when defence budgets in the west were severely cut.
Aside from sending shares in Meggitt and Chemring down 21 per cent and 22 per cent, respectively, these poorly received updates also weighed on other defence names, including Cobham (COB), Senior (SNR) and Ultra Electronics (ULE).
