A crucial 40mm ammunition contract for defence supplier Chemring (CHG) with a big Middle Eastern customer has finally won the go ahead, putting an end to months of delays that culminated in last year's profit warning. Investors were understandably relieved that an advanced payment has been made, amid fears that the low oil price environment could see the deal get shelved entirely.
Given how crucial the ammo contract is for earnings, a 9 per cent rise in the share price isn't surprising. With this deal now in the bag, the defence contractor already has a significant proportion of predicted profit for this financial year covered, together with three-quarters of anticipated revenue.
Defence contractors have looked to sell more weaponry to the Middle East in recent years to help compensate for depressed government budgets in the UK and US. Rising geopolitical tensions made that strategy largely successful, at least until finances in the oil-rich region came under pressure from the plummeting value of crude. Fortunately, this trend has coincided with a return to spending from the world’s biggest military forces, the impact of which is likely to be felt from the 2016-17 financial year.
