Flat defence spending, widespread uncertainty and the low oil price weighed on Chemring (CHG) in the reported period. The supplier of flares, bullets and radar systems stomached a 31 per cent decline in underlying operating profit to £3.8m, and management warned it would likely undershoot full-year earnings forecasts. Investors sent the shares down 18 per cent on the day.
Chemring's three divisions all saw sales rise by more than 5 per cent. Brisk demand for electronic warfare protection and hand-held detection equipment, combined with restructuring in the UK, drove underlying operating profit up more than sixfold in the sensors and electronics segment. But they slumped 17 per cent in the key energetic systems division, reflecting the delay of a key 40mm ammunition contract and a worse sales mix. And the countermeasures segment swung to a £1.4m operating loss as management closed out a low-margin contract and wrestled with production issues.
Chemring raised about £75m in net proceeds from a rights issue, allowing it to slash net debt by a quarter over the period to £114m. Management now has the breathing room to pursue cost-cutting initiatives, such as slashing headcount at its Kilgore subsidiary in Tennessee.
Broker Investec Securities lowered its forecasts and now expects pre-tax profit of £32.5m for the year to October, giving EPS of 9.9p (from £19.8m and 7p in FY2015).
| CHEMRING (CHG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 112.3p | MARKET VALUE: | £314m | |
| TOUCH: | 110.8-112.3p | 12-MONTH HIGH: | 210p | LOW: 90p |
| DIVIDEND YIELD: | nil | PE RATIO: | na | |
| NET ASSET VALUE: | 129p* | NET DEBT: | 32% | |
| Half-year to 30 Apr | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2015 | 162 | -15.1 | -4.9 | 2.4 |
| 2016 | 180 | -16.8 | -5.3 | nil |
| % change | +11 | - | - | - |
*Includes intangible assets of £195m, or 70p a share **Adjusted to reflect four-for-nine rights issue completed in February 2016 | ||||
