ii view: Chemring shares head lower

Full-year results to 31 October

• Revenue up 8% to £510 million
• Adjusted operating profit up 3% to £71 million
• Net debt of £53 million, up from £14 million
• Final dividend per share of 5.2p per share
• Total dividend for the year up 13% to 7.8p per share
• No new share buyback announced

Guidance:

• Continues to target annual revenue of £1 billion by 2030, up from 2024’s £510 million 

Chief executive Michael Ord said:

"2024 was another year of positive performance for Chemring as we continued to see heightened activity and progress across the group amidst growing demand for our products and services. 

“Changing customer spending priorities in the face of increased global uncertainty and competition have resulted in the order book being at its highest level in Chemring's history, giving us a strong and sustainable platform for future growth.”

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ii round-up:

Defence equipment maker Chemring Group (LSE:CHG) today flagged a record annual order book but with the rate of new orders received slowing.

An order book of £1.04 billion helped push adjusted operating profits up 3% to £71 million, fuelling a 13% increase in the total dividend payment for the year to 7.8p per share. Order intake of £672 million made for an 11% fall from a year ago, a slowing from a gain of 2% for the first half of the year to late April. Group profit margin of 13.9% also fell from 14.6% a year ago, hurt by operational difficulties at its US countermeasures factory in Tennessee.

Shares for the FTSE 250 company fell 10% in UK trading having come into these latest results up 3% year-to-date. That’s behind an 8% gain for major defence provider BAE Systems (LSE:BA.) during 2024. The 250 index itself is up 5% year-to-date.   

Chemring’s Countermeasures and Energetics products are used by military aircraft to fool ground to air missiles, along with providing cutting edge raw materials and aircraft safety components. The sensors and information business supplies products to detect biological and chemical weapons, as well as being used in the theatre of electronic warfare.

Accompanying management outlook comments pointed to a robust outlook for global defence markets, with strong growth expected over the next decade.

Group net debt of £53 million climbed from £14 million a year ago, fuelled by investment in factories with customers increasingly moving to long-term partnering agreements. 

Chemring reiterated its target for annual revenues of £1 billion by 2030, up from £510 million this year and £472 million last year. 

ii view:

Founded in 1905, Chemring today employs around 2,600 people. Group customers include military organisations, security and law enforcement agencies, as well as commercial aerospace markets including that of space. Countermeasures & Energetics accounted for its biggest slug of revenues over this latest fiscal year at 58%. Sensors & Information, and including its specialist Roke technology unit, focused on cyber security, secret cloud, and artificial intelligence, making up the balance.

For investors, a slowing in order intake should not be ignored. Operational challenges in the US are causing difficulties. An estimated price earnings (PE) ratio above the three-year average may suggest the shares are not obviously cheap, while a change of the US government and new pressure for peace deals in Ukraine and Israel  could see arms spending easing. 

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More favourably, recent global geopolitical tensions have left Chemring’s order book at a record and supportive of future revenues. Management confidence towards an ongoing rearmament upcycle continues to support a target to about double annual revenues £1 billion by 2030. Both product and geographical diversity exist with the Roke unit bringing a specialist focus on technological warfare, while the dividend payment has increased consecutively for more than the last six years, leaving the shares sat on an estimated future yield of around 2.2%. 

On balance, and despite ongoing risks, some exposure to defence looks to remain sensible in an uncertain world with Chemring still favoured among analysts. 

Positives: 

• Business type and geographical diversity
• Progressive dividend payment

Negatives:

• Defence is a volatile industry
• Exposure to currency movements

The average rating of stock market analysts:

Buy