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Chemring improving on all fronts

Following early contract delays, the defence contractor turned in a strong operational performance during the second half of its financial year
January 19, 2017

Chemring (CHG) swung back into the black at its October year-end, returned to the dividend list and confirmed that the board's expectations for the group's performance in the 2017 financial year remain unchanged. On an underlying basis, the defence contractor booked a pre-tax profit of £34m, a 72 per cent increase on the prior year, while operating cash flow more than doubled to £76.4m.

IC TIP: Hold at 173p

Strengthening cash generation meant that management felt able to reinstate the dividend that was put on ice as a consequence of last January's rights issue. About 60 per cent of the £80.8m raised from the issue was used to repay a portion of the group's outstanding US loan notes, thereby reducing net debt to a more than manageable 1.15 times cash profit, from 2.83 times a year earlier.

More importantly, the order book increased by £23m through the year, and stood at £593m at the period end, with just under two-thirds expected to be recognised as revenue in FY2017. However, the group's backlog can be erratic due to the nature of defence procurement. The prior year backlog, for example, included a big-ticket supply contract for 40mm ammunition. This time around, with a high proportion of contracts dollar denominated, the order book was inflated because of sterling's depreciation in the second half of 2016.

The stabilisation in crude pricing should underpin a gradual recovery in receipts from the energy sector for its Chemring Nobel division, a supplier of blast and fragmentation systems for the oil and gas industry, in addition to its activities in weapon systems and ammunition.

JPMorgan Cazenove increased its EPS forecast for the year to October 2017 to 11.5p (previously 11.3p), off cash profit of £79m, against 10.3p and £74m in FY2016.

 

CHEMRING (CHG)
ORD PRICE:173pMARKET VALUE:£482m
TOUCH:169-173p12-MONTH HIGH:175pLOW: 90p
DIVIDEND YIELD:0.8%PE RATIO:69
NET ASSET VALUE:148p*NET DEBT:21%

Year to 31 OctTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2012†74018.85.88.1
2013†472-66.5-24.66.1
2014†403-5.2-0.63.5
2015†377-9.1-2.42.1
201647782.51.3
% change+26---38

Ex-div: 27 Apr

Payment: 18 May

*Includes intangible assets of £210m, or 75p a share.

†EPS and DPS adjusted for Jan 2016 four-for-nine rights issue