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Chemring progress obscured by fraud investigation

The group put in an expectation-beating performance, but an unfortunately timed announcement temporarily scuppered share price gains
January 19, 2018

What should have been a good day for the management at defence technology group Chemring (CHG) was scuppered, albeit temporarily, by the Serious Fraud Office’s announcement of an investigation into “bribery, corruption and money laundering” involving a subsidiary, Chemring Technology Solutions Ltd.

IC TIP: Hold at 181p

The investigation – which began following an internal report by management – caused a drop in the share price, though it quickly rallied again. Notes in Chemring’s accounts say the investigation concerns two historic contracts, one from before the group acquired what would become CTSL and another from 2011, “neither of which are considered to be material in the context of the group”.

This aside, it was a good year for the group with results exceeding analyst expectations and prompting upgrades. Analysts at Investec increased adjusted EPS forecasts by 4 per cent to 12.7p, alongside pre-tax profit of £45.8m in 2018 (from 12.6p and £44.1m in 2017).

A swathe of exceptionals and non-underlying items including the introduction of IFRS 15, a change in accounting rules that affects how revenue is recognised on long term contracts,  put a dent in the statutory numbers. On an underlying basis, however, revenues were up 15 per cent, pre tax profits by 30 per cent and EPS by 25 per cent.

The group has been working to build on its position in the F-35 programme, but a spokesperson for the company also highlighted its Husky-Mounted Detection System, Next Generation Chemical Detector and Joint Biological Tactical Detection System as the three projects most likely to drive future earnings growth.

CHEMRING (CHG)   
ORD PRICE:195pMARKET VALUE:£545m
TOUCH:195.4-195.8p12-MONTH HIGH:208pLOW: 162p
DIVIDEND YIELD:1.7%PE RATIO:177
NET ASSET VALUE:144p*NET DEBT:20%
Year to 31 OctTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2013472-66.5-24.66.1
2014403-5.2-0.63.5
2015377-9.1-2.42.1
20164778.02.51.3
20175484.01.13.0
% change+15-50-56+131
Ex-div:5 Apr   
Payment:20 Apr   
*Includes intangible assets of £182.4m, or 65p a share