Shares in defence company Chemring (CHG) rose more than 4% to 194.25p thanks to a strong first half showing from its Energetics division. That’s ammunition and explosives to investors not in the know, its biggest unit.
In a world unfortunately shaped by political unrest and division, manufacturing 40mm grenades is apparently a service in demand. This is demonstrated by £44.3m of revenue earned from a single contract to supply these type of munitions to an unnamed Middle Eastern government during the six months to 30 April. That agreement was extended in April.
Ben Bourne, analyst at Liberum, says he expects the accompanying letter of credit for this ammo contract to be extended as ‘peace in the Middle East is unlikely’.
Chemring’s over all first half revenue hit £249.6m, up 39% on a year-on-year basis. The company also managed to turn an underlying £4m pre-tax loss into an £11.3m pre-tax profit, although that's after multiple adjustments, including £11.1m of restructuring charges.
Chemring had lost the faith of many investors after issuing several profit warnings during the past few of years. Part of the problems has stemmed from the delayed start of the 40mm ammo contact plus lower demand from US forces as troops were pulled out of conflict zones in Afghanistan and Iraq.
Not all guns and ammo
Chief executive Michael Flowers is unsurprisingly keen to look forward, not back. He tells Shares that the success has also been down to four key US programmes.
Two of these, the chemical and biological detection contracts, are ‘taking a long time to come to fruition’ but the F-35 and HMDS are seeing solid progress. The F-35 is a fighter jet that Chemring supplies countermeasures to, while HMDS, or Husky Mounted Detection System, is a large tractor-like mine sweeper.
Flowers believes that the business is now much more on the front foot.
Sanjay Jha, an analyst at Panmure Gordon, agrees. He says that in recent years, ‘Chemring has been a graveyard for reputations’. However, during Flowers tenure as chief executive, Jha says the management has ‘a chance to become predictable in an “under promise over deliver” way’.
Jha gives Chemring a target price of 216p, while Investec analyst Chris Dyett is slightly more bullish with a target of 220p. This is an upside range between 11% to 13%.
Chemring shares trade on price to earnings ratio of around 15-times, below the sector average of nearly 20-times. Flowers is bullish on the future as defence budgets increase, especially in the US which he says sets the tone for global spend.
