ii view: defence firm Chemring targets double annual sales

Full-year trading update to 30 September

• Order book up 27% to £1.1 billion
• Order intake year-to-date of £638 million, up from £604 million same time last year

Guidance:

• Expects full-year 2024 adjusted operating profit in line with City estimates of £70.8 million to £73.6 million – potentially up from 2023’s £69.2 million
• Continues to target annual revenue of £1 billion by 2030, up from 2023’s £472 million 

Chief executive Michael Ord said:

"The business has continued to perform as expected, and with FY24 revenue fully covered by the order book, we remain on track to deliver FY24 performance in line with the current range of analyst expectations despite current foreign exchange headwinds.

“The growth in order intake demonstrates both our customer's needs to rebuild their defence deterrent for the long term and their confidence in Chemring to develop and supply highly effective solutions.”

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ii round-up:

Chemring Group (LSE:CHG) is a maker of defence, security and aerospace equipment.

The Countermeasures and Energetics division supplies products 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 provides products to detect biological and chemical weapons, as well as items used in electronic warfare.  

For a round-up of this latest trading update announced on 17 October, please click here. 

ii view:

Started in 1905, Chemring today employs around 2,600 people. Customers include military organisations, security and law enforcement agencies, as well as commercial aerospace markets including that of space. Geographically, the UK and US each generated around 40% of sales during 2023, with Europe most of the balance. 

The Countermeasures and Energetics division generated most of its sales during 2023 at around three-fifths. The Sensors and Information division, accounting for the balance, also includes its specialist Roke technology unit. Roke is focused on areas such as cyber security, secret cloud, and artificial intelligence.  

For investors, bad weather has previously created operational disruption. Costs for businesses generally remain heightened. A forecast price/earnings (PE) ratio above the three-year average may suggest the shares are not obviously cheap, while defence expenditure is politically driven, with a potential change of US government possibly reviewing budgets and suppliers.   

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To the upside, ongoing geopolitical tensions and management confidence in the current global rearmament upcycle continues to see Chemring target a more than doubling in annual revenues from 2023 (£472 million), up to around £1 billion by 2030. The group’s order book continues to hit new records. Both product and geographical diversity exist, with the Roke unit bringing a specialist focus on technologic warfare, while the dividend payment has increased consecutively for more than six years, leaving the shares sat on a foecast yield of around 2.2%. 

For now, and despite continued risks, and while some investors will avoid the sector on moral grounds, some exposure to defence looks to remain sensible in a highly uncertain world, with Chemring a favoured play in the City. 

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