Chemring shares take off as digital defence orders soar

It’s now more than 15 months since Russia first invaded Ukraine and, although shares in defence companies such as BAE Systems (BA.) and Qinetiq (QQ.) have held onto substantial gains made on the prospect of more business, others have faltered.

Shares in Chemring (CHG), for instance, closed the day before its interim results announcement 10 per cent lower than they were when war first broke out.

In one way, these results justify this underperformance. Operating profit fell by more than a fifth as the company reported delays to expected orders, particularly in the US where squabbles over the debt ceiling have slowed contract awards.

These meant its cash flow from operations also halved to £22mn, as it continued to make working capital investments during what chief executive Mick Ord described as “a period of heightened activity”. Its order intake in the first half rose by 81 per cent to £338mn and it is now sitting on an order book worth £750mn – its highest level in more than a decade.

The company expects both profits and cash flow for its countermeasures and energetics arm to improve in the second half, though. A widely reported depletion of munitions stockpiles among major western powers, who have been providing Ukraine’s forces with artillery shells, is now being addressed. The UK government’s most recent Budget allocated an extra £1.9bn over the next two years to boost its munitions infrastructure.

Chemring’s board recently approved a £90mn investment to increase the capacity of its energetics arm, which makes materials for munitions – a move it says will bring in an extra £60mn of annual revenue once complete.

On the other side of its business, sensors and information, it has also been committing more capital to its Roke digital defence business, whose revenue and order book both grew by more than 40 per cent year on year. Its margin also remained robust, despite heavy levels of investment, and the company upgraded its medium-term expectations for the business.

This helped to push Chemring’s shares 9 per cent higher to 293p, which works out at around 15 times FactSet’s consensus earnings forecast of 19p a share – slightly below their five-year average. As we argued in March, history still seems to be weighing on sentiment after the company spent the past decade repairing its previously overextended balance sheet, but it is in much better shape as it launches its latest growth charge. Buy.

Last IC View: Buy, 274p, 23 Mar 2022