Chemring price target lifted by Peel Hunt after “in line” trading update

Chemring Group (LSE:CHG) PLC, the decoy countermeasures specialist, said results for the year to the end of October are on course to be in line with expectations.


The group’s order book at the end of last month stood at GBP464mln, up from GBP450mln at the end of April, which, based on expected delivery schedules, is enough to ensure the company meets full-year targets.


Order cover for the next financial year is building, Chemring said, with the Countermeasures & Energetics arm having 67% order cover of expected revenue and the shorter cycle Sensors & Information sector having 45% cover.


Net debt at the end of August had been whittled down to GBP38mln from GBP39mln at the end of April and GBP48mln at the end of October 2020. The group said it expects to maintain a strong level of operating cash conversion through to the end of the fiscal year (FY21) thus further reducing debt.


“This has been another busy period in which the resilience of the group has been further demonstrated. We continue to make good progress against our strategic and operational goals, as such, our expectations for FY21 are in line with current analyst expectations,” said Michael Ord, the chief executive of Chemring.


“We have good momentum as we move into FY22. I am confident the focus we have placed on building a high quality, technology-based business will enable us to take further advantage of our increasing opportunities for growth in the coming years and our long-term prospects remain strong,” Ord added.


Peel Hunt said it was a “confident” update from Chemring as it reiterated its ‘buy’ recommendation and nudged up the target price to 360p from 350p.


The broker has increased its full-year earnings before interest, tax and amortisation forecast by 2% to GBP57.5mln while the adjusted earnings per share forecast rises to 16.6p from 16.3p.


“The beat vs our expectations is in Roke, which continues to grow well (double digits) and at high margins – the recent acquisition of Cubica is bedding in well and is likely to enhance the growth prospects in this division further,” the broker said.


“Net debt should also come in ahead of expectations, as some capex investment is likely to slip into next year; we are now expecting net debt of GBP32mln (which includes GBP4.4mln lease liabilities), down from GBP43mln.


“All in all we see this as a solid update, delivered against a backdrop where demand is healthy, but still balanced by reports of Covid-related delays within the DoD [Department of Defence] and the supply chain, which management has been able to manage and deliver to customer and market expectations. Our target price increases in line with the upgrade to 360p (from 350p) and equates to a PE [price/earnings ratio] of 21x FY21E, falling to 20.5x FY22E, which is undemanding in our view (supported by recent deal activity in the sector). We see more upside to come, especially from Roke and Cubica, and reiterate our Buy recommendation,” the broker concluded.


Shares in Chemring trade at 321.5p, down 2.4% on the day

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