Investment Ideas 

Chemring changes top brass, again

HOLD

Tip Update: Hold at 196p

Tip style
VALUE
Risk rating
MEDIUM
Timescale
LONG TERM
Our previous tip
We said BUY at 229p on 09 Jan 2014
Tip performance to date
-14%

Mark Papworth’s tour of duty with Chemring (CHG) has ended abruptly after just 19 months in charge. The critical restructuring and disposal programme that he was parachuted in to oversee is now largely complete, and chairman Peter Hickson has decided a military man is what’s needed now. Half-year results were much as expected, but there's still plenty of recovery work left to do.

“It had become clear over the last 2-3 months that we needed a top management team steeped in the defence industry,” Mr Hickson told us. “It seems a logical change.” Michael Flowers spent 22 years in the Australian Army, and after a stint at BAE Systems (BA.) he ran Chemring’s Australian operation, then the munitions division. And Mr Flowers is also “committed to the current strategy”.

That will mean sorting out legacy operational issues, mainly at three US sites, including accident-prone flares unit Kilgore. Thankfully, progress is already being made: improved margins at the Sensors & Electronics unit helped limit the decline in underlying pre-tax profit to 30 per cent, giving £13.4m.

Factoring in a fatal accident at Kilgore, weakness in countermeasures and revised foreign currency assumptions, Investec Securities has cut its full-year EPS forecasts by 9 per cent. It now expects adjusted pre-tax profit of £33.7m, and adjusted EPS of 13.3p (from £52.4m and 21.2p in 2013).

CHEMRING (CHG)

ORD PRICE:196pMARKET VALUE:£379m
TOUCH:195-196p12-MONTH HIGH:323pLow:   186p
DIVIDEND YIELD:3.2%PE RATIO:na
NET ASSET VALUE:156p*NET DEBT:76%

Half-year to 30 AprTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2012225-12.7-3.63.4
20132095.12.42.4
% change-7---29

Ex-div:23 Jul

Payment:15 Aug

*Includes intangible assets of £205m, or 106p a share

IC View

An abrupt change at the top, plunging profits and tricky markets have derailed our once-successful buy tip (229p, 9 Jan 2014). Lower net debt and non-defence acquisitions are possible catalysts, but the crucial order book is shrinking. Although the shares are nearing technical support, we’re downgrading our advice. Hold

Last IC view: Buy, 215p, 17 June 2014

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