Chemring causes major divide in City

Flares and countermeasures expert Chemring did what was expected of it during the second-half, so will meet full-year expectations. Selling its European ammunition business repaired the balance sheet, too, and the share price has increased in line with rising geopolitical tensions. Visibility, however, remains poor and the shares could meet stiff resistance as they approach a key technical level.

The final quarter was hit by delays to product shipments following February's accident at its Countermeasures facility at Kilgore. That meant a slump in the top line to £117 million from £185 million a year ago. In the fourth quarter of 2012 it was £242 million. That's why full-year revenue is down at around £475 million from last year's £625 million.

Ahead of confirmation of full-year results in late January, Chemring said that it had drawn down net debt by over £100 million to £136 million. That’s due to the £134.5 million sale of its European ammunition business. Strip that out, and annual revenue from the remaining business is down to £403 million from £472 million.

Chemring's order book reflected recent market trends, with significant orders from the biggest spender US, and the Middle East. The order book stood is up £68 million to £486 million. JPMorgan reckons the defence specialist has had a period of "good operational performance" across its Countermeasures, Sensors & Electronics and Energetic Systems businesses.

Since the financial crisis of 2008, global defence budgets have been slashed, but markets have been hoping that rising geopolitical tensions will see an increase to national budgets. Panmure Gordon agrees, taking the view that a ground war is looming.

"We believe that the US and its allies will have little choice to get involved in a protracted conflict in the Middle East as it is becoming clearer that it cannot rely on local allies to restore order in the region," said Panmure Gordon analyst Sanjay Jha. "The resignation of the US defence secretary is a clear sign that the more hawkish General Dempsey, who believes that war in Iraq and Syria cannot be won without boots on the ground, has won the argument."

Jha confirmed to Interactive Investor that Panmure's target price is, indeed, 328p.

But the City is clearly split here. Westhouse Securities continues to take a dim view of the US Defence Budget outlook, potential margin pressure at sensors & electronics in 2015, plus a high valuation. It reckons consensus EPS forecasts are "optimistic." For 2016, the broker's own estimates are 20% below that. The shares are worth just 130p, it says.

JPMorgan has mixed views: "End markets remain challenging but internal progress is continuing and the group appears to be entering full-year 2015 in better shape than full-year 2014 financially, operationally and strategically."

It reckons that while more frequent and larger contract wins, increases to budget spending and corporate activity provide upside risk to the company, investors should keep an eye out for market uncertainty, budget pressure, forecasting uncertainty and further operational issues.

Chemring shares are up from a low of 181p in June, but have failed to make a move above 247p stick. And with the shares already trading on 16.5 times consensus estimates for 2015, it will take a serious ramp up in earnings to justify that multiple. Panmure thinks it's possible, and a breakout would clearly be a major event. Plenty think a move sideways is more likely.

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