Chemring bolstered by cyber defence business

Last week, 10 nations took part in an exercise that simulated a cyber attack on the global financial system which was observed by the World Bank, the IMF and the Bank of International Settlements, according to Reuters.

The exercise demonstrates the scale of the perceived threat to critical systems in a year which has seen US fuel pipelines and the computer system running Ireland’s health service knocked out by ransomware attacks.

Defence company Chemring (CHG) has been a beneficiary of increased cyber security spending. Its revenue was 2 per cent lower year on year, but 1 per cent higher on a constant currency basis.

The performance of its Roke business, which provides cyber security research and advisory services to government and corporate clients, was flagged as a highlight as the division’s revenue, operating margin and order intake all grew by double digits. Roke now provides one-fifth of group revenue. Most of its business is currently in the UK, but a push into the US in its current financial year will require a higher sales and marketing spend. Chemring can easily afford this, having reduced net debt by 45 per cent during the year to £26.6m, or 0.35 times cash profit.

Roke’s contribution helped to offset a decline in revenue of its countermeasures and energetics business, which suffered from delays to orders it attributed to Covid-19 and the change in administration in the US.

Chemring’s order book increased by 5 per cent to £501m at its year-end, £358m of which is likely to be recognised as revenue this year. This covers about 84 per cent of the £426m of sales broker Panmure Gordon forecasts for its current year. It increased its earnings per share forecast for the company to 18.3p. Chemring’s shares currently trade at 16 times this level, compared with an industry average for aerospace and defence companies of 19.5 times. This, and continued growth in global defence spending, support our buy recommendation.

Last IC View: Buy, 301p, 15 Dec 2020