Chemring Group – Countermeasures Offer an Attractive Opportunity

This FTSE 250 group knows how to deceive.

In fact, it is an important part of its business.

The £894m capitalised Chemring Group (LON:CHG) has two major sides to its corporate action – just over one third is sensors and information, while the balance two thirds is countermeasures and energetics.

So, when we read about UK or even global defence sector spending, we should think just how much is going to be handled by this group.

The Romsey, Hampshire-based group’s very high technology products and its various services are provided to the global aerospace, defence and security markets.

With over 2400 employees, Chemring has production operations in four countries, and sells into some 50 countries across the world.

Countermeasures

It is the world leader in the designing and manufacture of disposable electronic countermeasures, which are devices produced to trick or deceive radar, sonar or other detection systems. They are used for protecting air, sea and land platforms against the threat of guided missiles.

Energetics

The group’s world-class energetics capabilities include cutting-edge raw materials to meet unique client product requirements, actuators, air crew safety systems, and missile and rocket components.

Sensors and Information

The technology used in Chemring’s sensors and information side helps to safeguard and protect people, assets and secrets, while defeating adversaries.

Uses include electronic warfare, chemical and biological detection, explosive hazard detection, while taking in innovation, technology and data science.

Group Sales

Unsurprisingly just over 50% of the group’s sales go into the US, while the UK takes about 30%, with the Rest of Europe accounting for nearly 14%, the balance going to Asia Pacific and the rest of the world.

Massive Order Books

A healthy number of recent contract wins has expanded the group’s order book.

As at 31 October the order book was 30% better on the year at £650.9m (30 April 2022: £488m).

The group has stated that order cover for FY23 was building, with Countermeasures & Energetics having 93% order cover of expected revenue and the shorter cycle Sensors & Information sector having 60% cover.  

Institutional Investor Support

Amongst the excellent shareholders list, it is worth noting that ten institutions holding over 4.75% account for nearly 53% of the 283.5m issued shares. There are several other professional holders in the equity, tightening it up quite markedly.

The Final Results

The results to the end of October reported a 13% increase in revenues to £442.8m, while its underlying pre-tax profit was 12% better at £62.5m, with its basic earnings were up 20% at 20.2p, enabling a 19% increase in its dividend to 5.7p per share.

The group’s balance sheet is very strong, with just a net debt of £7.2m (£26.6m).

Sensors and Information revenues were up 8% at £157.8m, with its underlying operating profit being 5% lower at £29.9m. Its order book was £148.0m, up 30%.

Countermeasures and Energetics revenues were 7% better at £263.4m, with its underlying operating profit 17% higher at £46.6m. Its order book increased 18% to £456.1m.

There is some 86% order cover for 2023’s expected revenues.

Group Chief Executive Michael Ord stated that:

“This has been another year of positive performance and growth across the Group, exceeding the Board’s initial expectations despite a challenging macro-economic environment. I am delighted with the financial and operational progress that continues to be made across the Group as we build a stronger, higher quality and technology focused business.

“Trading since the start of the current financial year has been in line with expectations. With 86% of FY23 expected revenue covered by the order book, the Board’s expectations for FY23 performance are unchanged. Chemring is well placed, with a robust strategy, market-leading positions across different geographies and sectors, and with products and services that are critical to our government and blue-chip customers around the world. Chemring’s long-term prospects remain strong.”

The Consensus View – Upgraded Estimates

After these latest results broker’s analysts have upgraded their estimates for 2023 and beyond.

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

The consensus data suggests that revenues for the year to end October 2023 will show through around £461m, with underlying operating profit of £68.0m worth 19.4p per share in earnings.

Going forward the 2024 revenues could rise to £480m, creating £71.9m of profits and 19.6p of earnings per share.

Conclusion

The group uses its world-class expertise and innovation to protect people, platforms, missions and information against constantly changing threats. 

Its order books are increasing significantly, no doubt helped by the various conflicts around the world, let alone the Ukraine War and the US fear of Chinese incursions.

It has excellent visibility for the current year now underway.

The figures clearly show that ‘deceiving and protecting’ is indeed very good business.

The group’s shares, which were up to 383.5p earlier this year, are now just 307p, at which level I consider them to offer excellent growth potential over the next couple of years.

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

(Asterisks * denote that Target Prices have been achieved since Profile publication)