Demand blows up at Chemring’s energetics arm

Although Chemring’s (CHG) full-year numbers came in slightly ahead of expectations, the muted reaction from investors is somewhat understandable.

Although the company reported an 18 per cent increase in revenue and a 17 per cent jump in underlying pre-tax profit, these were against a revised set of figures that don’t include its explosives hazard detection business, which has been discontinued following a review that concluded there weren’t enough decent opportunities for it to pursue.

Almost £50mn of impairments were recorded against its chemical and explosive hazards detection arms, which was the main factor behind an 89 per cent slump in net profit, to £5.4mn.

Aside from this, though, Chemring’s prospects continue to look bright. “The geopolitical turbulence we are experiencing has resulted in many countries reassessing their defence and national security priorities and associated budgets,” chief executive Mick Ord said.

In Chemring’s case, this translates into higher demand for its energetics products, which are used in missiles and munitions – of which there is currently a major shortage.

Order intake for Chemring’s countermeasures and energetics arm increased by 52 per cent to £541mn, pushing its order book up to £751mn, which is well above the £400mn or so it was averaging prior to last year. Countermeasures and energetics now has a book-to-bill ratio of 189 per cent, with most of its expected revenue for the next three years already in the bag.

Little wonder, then, that Chemring recently announced plans to spend £120mn to increase capacity at its three energetics factories in Norway, Scotland and the US, which Ord said would bring in an extra £85mn of revenue and £21mn of operating profit a year from 2027 onwards. However, this will mean capex will remain elevated until then – at £70mn for 2024, £60mn for £2025 and £50mn for 2026, which includes £20mn a year of maintenance capex.

Prospects also look decent for its sensors and information arm, whose 55 per cent revenue growth was driven largely by the Roke software and technology business.

Broker forecasts for this year are fairly are muted given the heightened capex spend – FactSet consensus estimates are for 3.5 per cent earnings per share growth. Yet increased orders should start to translate into meaningfully higher profits from 2025 onwards and with the shares currently priced in line with their five-year average in terms of both forward earnings and book value, we still think they look like decent value. Buy.

Last IC View: Buy, 293p, 06 Jun 23