Chemring’s H118 report demonstrates improved operational performance and financial security. While FX headwinds persist, the operating margin improvements at Countermeasures and Sensors are visible, as is improved cash generation. End markets are evolving from the perceived threat to increasing budgets, which underpins Chemring’s market position. The FY18 outlook remains unchanged, underpinned by the H2 order book.
Written by
Chemring |
Ducks aligning
|
Aerospace and defence |
QuickView
21 June 2018 |
Share price graph
Share details
Business description
Bull
Bear
Analysts
|
||||||||||||||||||||||||
Chemring’s H118 report demonstrates improved operational performance and financial security. While FX headwinds persist, the operating margin improvements at Countermeasures and Sensors are visible, as is improved cash generation. End markets are evolving from the perceived threat to increasing budgets, which underpins Chemring’s market position. The FY18 outlook remains unchanged, underpinned by the H2 order book.
H118 focus on profitability improvement
Reported H118 revenue of £229.3m (H117 £249.6m) represented a 2% organic decline, reflecting the expected lower 40mm ammunition deliveries to the Middle East. More encouragingly, underlying operating profit of £18.1m (H117 £11.3m) demonstrated a 14% organic improvement as the operational excellence programme bears fruit. Operating margin improvement was apparent in both Countermeasures and Sensors. Although order intake was down y-o-y (H118 £208m vs H117 £218m), H218 is 80% covered by the existing order book and the market backdrop remains supportive. The financial turnaround of the business is visible in the improved cash generation and reduced net debt at £84.6m (H117 £111.7m). The 10% increase in dividend to 1.1p (H117 1.0p) was also a positive.
Market strengths
Chemring has taken significant steps to address its operational performance and financial strength. The company expects group operating margin to increase by 75bp in FY18 and by 300bp by 2022. Progress is supported by the company’s ability to make sensible capital allocation decisions and invest in growth. Meanwhile, the company recognises increased tension has brought defence spending into greater focus around the globe. While the US remains the dominant market, we see multiple opportunities for Chemring. Activity in Countermeasures is encouraging on many fronts while the need for Sensors’ products is evident with the growing chemical weapon threat. In addition, budget support for Roke’s consultancy services is being driven by increasing information security threats.
Valuation: Self-determination
While FY18 is a year of consolidation for the company, operational improvement is still expected. The shares are trading on 16.9x FY18 consensus EPS falling to 15.3x FY19, which represents a modest premium to peers. We continue to believe the market backdrop plus self-determination afforded by the removal of the debt constraint warrants increasing optimism.
|
Consensus estimates
Source: Bloomberg |
Chemring is a client of Edison Investment Research Limited.
|
Disclaimer
|
|
Disclaimer
|
Research: Metals & Mining
On 11 June, Wheaton Precious Metals (WPM) announced that it had entered into an agreement with Vale to acquire 42.4% of cobalt production from Voisey’s Bay from FY21 for an upfront cash consideration of US$390m. We estimate that this acquisition will increase WPM’s silver-equivalent production by 3.1Moz and 4.7Moz and its basic EPS by 4.7c and 9.3c in FY21 and FY24, respectively.