Shares in defence firm Chemring Group (LSE: CHG) fell by 10% this morning, after the group published a disappointing set of results and announced details of a planned £80m rights issue.
Chemring’s revenue fell by 6.5% last year and the group’s pre-tax loss widened to £9.1m from a loss of £5.2m in 2014. Net debt rose by 14% to £154m.
Chemring experienced a number of contract losses and delays last year, leaving it at risk of breaching its debt covenants. The group announced its intention to raise cash from shareholders in October and today’s news confirms these plans. Chemring will raise £80.8m by issuing four new shares at 94p for every nine existing shares.
Based on the information provided by the company, my calculations suggest that this should reduce net debt to between £80m and £100m. Based on the increased share count and the current forecasts for 2016 earnings, I estimate that Chemring shares should trade on a 2016 forecast P/E of around 15 after the rights issue.
I’m not sure that this is great value. Chemring’s business has declined steadily over the last few years. Although market conditions for defence firms do seem to be improving, I’d prefer to see more evidence of a recovery before buying.
Rolls-Royce
Shares in Rolls-Royce Holding (LSE: RR) have fallen by 50% since May 2015. It’s tempting to think that they must now be good value, but is this true? Long-time Rolls fan Neil Woodford recently sold his entire holding.
Although Rolls shares trade on a modest 2015 forecast P/E of 10, the outlook is rather different for 2016. Earnings are expected to fall by more than 40%, leaving the shares on a forecast P/E of 18.
Aside from its own restructuring challenges, Rolls faces a slowdown in the oil and gas-led offshore marine market. It also expects falling sales of corporate jets powered by Rolls engines, and reduced demand for its profitable aftersales services.
I’m confident Rolls will eventually recover under the management of ex-ARM Holdings boss Warren East, but I don’t see any reason to buy today. The current market turmoil makes me even more cautious. I’ll be very surprised if Rolls shares don’t have further to fall.
Halfords
One of the top performers in the UK market today is Halfords Group (LSE: HFD). Shares in the cycle and car parts retailer rose by 9% this morning after the company said that cycle sales returned to growth during its third quarter, which included Black Friday and Christmas.
However, like-for-like sales growth for Cycling was just 1.1%. The group’s total sales rose by just 0.4% during the period. Growth has been much slower than during the same period of 2014, so it may be too soon to draw any conclusions.
Halfords’ full-year profits are expected to be in line with previous guidance, putting the shares on a forecast P/E of 11 and a prospective yield of 4.7%. Halfords has very little debt and has historically generated enough free cash flow to comfortably cover its dividend. I’d expect the firm’s sales to be able to support this modest valuation.
If you’re confident about the UK economy, Halfords could be a solid contrarian buy.
