Annual profits are up 66% at defence firm Chemring.
Chemring Group (LSE: CHG), the maker of flares, chaffe and munitions for the military, announced another explosive set of results yesterday. Investors have already sent the FTSE 250 company's shares soaring higher on the distractingly good numbers -- continuing the jet-fuelled ascent of recent years.
Sometimes these sentences just write themselves. But while purple prose is all very well, it helps to get the story before shares hit the stratosphere.
Chemring is one of the best performing UK companies of the past decade -- one of those legendary multi-baggers. You could pick them up for 210p around the dawn of the Century, and they now cost £31 – a cool 15-fold increase in ten years. They're up over 600% in the past five years alone, with this year seeing Chemring break through the £1 billion valuation barrier for the first time.
But the two questions for would-be shareholders who aren't in possession of a working TARDIS are: Can the good times for Chemring continue, and even if they do, after such a great historical performance will you pay too much to get on-board?
Great results, growth continues
It hasn't been profitable to bet against Chemring for many years, and Tuesday's results confounded anyone looking for a slowdown, with growth numbers more akin to a company coming out of a downturn than a manufacturer at the top of its game.
As Chemring's long-standing Chairman Ken Scobie pointed out: "During 2009, three significant landmarks were reached -- group revenue exceeded £500 million; underlying profit before tax exceeded £100 million; and our market capitalisation increased to over £1 billion."
Yet the growth impresses even more than these absolute figures.
Revenues rose 42% to £503.9 million, and profit before tax rose 66% to £95.8 million. Earnings per share was up 33% to 213p, too, and prodigious cashflow supports the dividend being lifted a very generous 43% to hit 50p a share -- still covered over four times by earnings.
Acquisitions have played a part in Chemring's growth, but it hasn't been at the expense of the balance sheet -- net debt rose by 5% to £123 million, but that's actually a reduction in gearing, year-on-year.
Most importantly, the company's order book rose 37% compared to last year, with £559 million of revenue on the slate already.
Fighting on all fronts
Alongside its results, Chemring also announced the acquisition of Allied Defense Group, its second US-based purchase in the past year, for £36 million. Chemring presents this acquisition as bolting-on both metal-working know-how and a new internal market for its propellants, explosives and fuses. The company already trades across several different niches, represented as:
- Pyrotechnics -- Smoke, distraction grenades and other specialised supplies
- Explosive ordinance disposal -- Bomb disposal gear, essentially
- Munitions -- Ammunition, particularly to naval forces
- Countermeasures -- Flares, chaff and other decoys
These broad divisions represent more that a dozen Chemring-owned companies around the world, and its success gives credibility to the claim they are leaders in their specialist fields.
On that note I was pleased to see R&D expenditure has doubled to £18.9 million. That's still less than 4% of revenues, which doesn't seem especially high, but the company also spent £33 million maintaining or upgrading its factories and other fixed assets (about the same as past year).
Besides, reliability and connections are probably at least as important as cutting-edge products in the Arms Trade. And what's key, bluntly speaking, is war.
Shoot, I missed it
However you dress it up, it's hard to imagine world peace would be great for suppliers to the military, and it's no coincidence that Chemring's growth has come in a decade when the US and the UK have been fighting on two fronts.
That said, the conflict in the Middle East hasn't been a blank cheque for all such companies. Defence group QinetiQ (LSE: QQ) recently gave a fresh profit warning, prompting Goldman Sachs to cut earnings estimates with a reminder that the US has delayed sending more troops to Afghanistan, and that UK public finances are stretched.
Surely these factors apply to Chemring, also, even if they are not showing up yet in the results?
For now, consensus estimates are for 250p earnings per share in the year to October 2010 for a forward P/E of under 12, with growth of 17% equating to a PEG ratio of just 0.7 -- a tempting valuation for a company that has grown earnings by 30-60% a year since 2005.
The shares are up 5% as I write, perhaps on the same news of a Republican win in the Massachusetts Senate race that has lifted the drugmakers. Traders may see the loss of the Democrat's crucial 60-seat majority in the Senate as meaning President Obama will need to pursue more hawkish policies in the Middle East -- or at least dampen down any military spending cuts.
Good news for right-leaning Americans and potentially for Chemring, but perhaps not so good for the world. I avoided buying Chemring for this reason when it first hit my filters in 2005 priced around £4, and my sensitivities have cost me dearly.
Those who (perhaps quite rightly) don't mind what a company does provided it's within the law may want to consider picking up the shares even after their great run, given the undemanding valuation -- provided they believe Obama's Nobel Peace Prize was a tad premature.
More from Owain Bennallack:
