Chemring’s (CHG) half-year figures were met with approval from analysts at Peel Hunt, who pointed to “a better underlying trading environment overlaid with self-help initiatives that have driven much improved margins and lower net debt”. A net working capital reduction and a 44 per cent fall in finance costs suggest that management has paid due attention to those aspects of the business within its control. It’s just unfortunate that the defence contractor updated the market on the day that reports emerged of a meeting between Theresa May and Gavin Williamson, the Defence Secretary, during which the Prime Minister questioned the UK’s status as a “tier one” military power.
Happily for Chemring there are no such qualms across the Atlantic, where “the Presidential Budget Request for Fiscal Year 2019 sees the largest military budget in US history, at $700bn (£531bn). So, it's little wonder the group has initiated a $50m programme to transform its Tennessee facility, with the aim of reinforcing its position in the global countermeasures market (flares, chaff and decoys, including infra-red and radio frequency jamming). The order book for this segment of the business – which is also the most profitable – came in at £193m, an 11.6 per cent increase at constant currencies since the October year-end; that's something of a contrast to the group backlog, which at £442m was £36m adrift of the end rate in FY2017. There’s a degree of predictability, however, because £212m should be delivered over the second half, representing around 80 per cent of expected revenues.
The countermeasures market continues to show rising bid activity and order intake, but recent events in Salisbury and Syria could act as demand catalysts for products within the group’s sensors segment - particularly those concerned with chemical and biological detection. The group remains in the mix for several contract awards in this area from the US Dept of Defense, though they’re still “subject to on-going development, customer testing programmes and customer decision making processes”.
Peel Hunt gives cash profits of £83.6m for the Oct 2019 year-end, together with free cash-flow yield of 5.9 per cent, rising to £86.9m and 6.6 per cent in FY2020.
|ORD PRICE:||219p||MARKET VALUE:||£612m|
|TOUCH:||218-220p||12-MONTH HIGH:||224p||LOW: 162p|
|DIVIDEND YIELD:||1.4%||PE RATIO:||na|
|NET ASSET VALUE:||137p*||NET DEBT:||23%|
|Half-year to 30 Apr||Turnover (£m)||Pre-tax profit (£m)||Earnings per share (p)||Dividend per share (p)|
|*Includes intangible assets of £171m, or 61p a share|
There was no material update on the ongoing investigation by the Serious Fraud Office into allegations of money laundering and bribery, and therefore no indication of any contingent liabilities, though the group did reveal a £17.4m deferred tax write-off relating to changes under US tax legislation. Outside the burgeoning US market, a firming oil price could translate into improved order intake from customers in the Middle East. But the shares are trading bang in line with their historic P/E ratio. Hold.
Last IC view: Hold, 181p, 19 Jan 2018