Chemring Group Ahead of its Finals Next Week

The United States and its allies are continually reassessing defence priorities after Russia’s invasion of Ukraine coupled with the rise of China.

The US Defense Department had a $742.3bn spend, which is expected to increase significantly.

The current UK annual defence budget runs at about £50bn, with orders planned in shipbuilding, space, cyber, research and other sectors. While also on the shopping list are new frigates, a fleet of logistics ships, multi-purpose research ships, various cyberspace and space assets, as well as a new agency focused on artificial intelligence.

In addition, there is an increase in the spend on military modernisation, research and development, taking in added commitment on future combat air systems.

The UK is the largest spender on defence in Europe and the second largest in NATO.

So, such fact and information back up the perceived potential for today’s profiled group.

So old in the tooth but still impressed

It feels like I have been following the fortunes of the Chemring Group (LON:CHG) for decades, yet it still holds my attention and interests me as a defence-sector business.

Therefore, I am looking forward to Tuesday of next week when the FTSE-250 company reports its final results for the year to the end of October.

Tight Reporting

I remain ever impressed that such a global operating business can get itself together well enough to report its figures inside just six weeks from its year end.

That is an example that hundreds of the UK’s quoted companies should be looking to emulate.

Group History

I refer to a description from Wikipedia:

“The company was originally formed during 1905 as The British, Foreign & Colonial Automatic Light Controlling Company Limited, which manufactured timers for gas street lighting.

Deciding to venture into electrical filaments, which were used for electric lights, it found demand for the technology from both domestic and foreign armed forces, using it as chaff, a radar decoy.

During 1974, the company was first listed on the London Stock Exchange. In 1982, Chemring drastically increased its production of decoys to supply British forces engaged in the Falklands War.

The company again rapidly increased its rate of production of countermeasures to supply coalition forces in the Gulf War of 1991.

In 1992, Chemring acquired its main British competitor Haley & Weller. In the following decades, Chemring acquired various businesses while expanding, particularly in the North American market.

By 2010, Chemring Group reportedly held roughly 50% of the global market for countermeasures.

It has also become the dominant supplier of such devices to both the UK and US armed forces.”

The Business Today

For well over 117 years, and now operating in over 50 countries, Chemring has been supplying innovative solutions to the world’s most demanding customers – in aerospace, defence and security.

It is a global business that employs some 2,400 people and operates with production facilities in four countries.

The group believes that, with its countermeasures, sensors and energetic solutions, it helps to solve some of the critical problems in making the world a safer and better place.

Its Operations

The group is organised under two strategic product sectors: Sensors & Information (37.3% of group sales); and Countermeasures & Energetics (62.7% of the group’s £393m turnover in the 2021 trading year).

Employing some 500 scientist, engineers and consultants, its sensors and information side covers advice, design, engineering, research and solutions.

Spreading across the defence, national security and industrial domains and operating across the whole life cycle – advice, engineering, design, research and solutions, this side is focused on information and electronic warfare, chemical & biological agent and explosive hazard detection.

The group’s countermeasures and energetics side is the world leader in the design, development and manufacture of advanced expendable countermeasures and countermeasure suites for protecting air, sea and land platforms against the growing threat of guided missiles.

Advanced flares, special material decoys, naval countermeasures, explosive materials, aircraft safety components, pyro-mechanisms, conventional flares, chaff, space launch initiators and release mechanisms, missile and electronics, breaching and demolition, extruded double base propellants – they cover the gamut.

Its cutting-edge innovations, include high reliability single-use devices that perform critical functions for the space, aerospace, defence and industrial markets.

In the year to end October 2021 the group’s geographic sales per region split was 50.9% to the US, 30.5% to the UK, Europe was 13.7%, Asia Pacific was 4.00%, while the Rest of the World accounted for 0.9%.

The Equity

There are some 283.5m shares in issue.

The larger holders include Invesco Asset Management (8.10%), BlackRock Investment Management (5.02%), JO Hambro Capital Management (5.00%), Threadneedle Asset Management (5.00%), Aviva Investors Global (5.00%), FIL Investment Advisers (4.99%), Jupiter Asset Management (4.96%), Royal London Asset Management (4.91%), Liontrust Portfolio Management (4.90%) and Schroder Investment Management (4.79%).

The Consensus View

There are some eight analysts covering this group’s fortunes.

The consensus data suggests that revenues for the year to end October will show through around £429m (£431m), with underlying operating profit of £63.4m (£57.5m) worth 18.4p (16.9p) per share in earnings.

For the current year estimates suggest £450m sales, £67.5m profits and 18.9p earnings.

Going forward to 2024 revenues of £471m, could create £71.6m of profits and 19.6p of earnings per share.

Dividend per share growth is expected to show through against 5p in 2021, up to 6p in 2022, 7p this year and 8p next year.

My View

The£4bn bid a couple of years ago from the US-based Advent International for the Cobham Group, clearly showed an appetite for participation in the UK defence sector.

This group’s increasing order book gives significant multi-year visibility, while also creating high barriers to entry.

The company has a diversified, protection-led portfolio, while enjoying strong customer relationships on a global basis and operating in niche markets where it has clear technology differentiation.

Its longer-term growth is underpinned by increasing demand and possible market share gains augmented by selective acquisitions.

Overall, its prospects remain strong.

Twelve years ago, the group’s shares hit 640p each, over the last five years the highest level they scored was at 384p in May this year.

Last Friday night they closed at 304.5p, which as far as I can assess, offers a significant upside.

The finals due next week will, hopefully, spell out the group’s potential and its current year prospects, sufficiently enough to help re-rate its equity.

(Profile 20.06.19 @ 177p set a Target Price of 300p*)