UK stock Chemring (LSE: CHG) delivered an upbeat half-year results report today (4 June) covering the period to 30 April.
The global business makes high-technology products and provides services for the aerospace, defence and security markets.
Chief executive Michael Ord said the company is a key supplier to security alliance NATO (North Atlantic Treaty Organization).
The booming defence sector
Ord reckons an increase in geopolitical tensions around the world is driving a “fundamental” rearmament upcycle, and it’s likely to last for “at least” the next decade.
There was momentum in the business during 2023 and it’s continued into 2024. After “record” order intake, the company has an order book worth more than £1bn – up 39% at the end of April compared to a year earlier.
Ord said there’s good visibility of forward revenue and potential earnings. The business also attracts grant funding, and customers are moving towards long-term partnering agreements with the company.
Those positives have given the directors the confidence to invest in further capacity and capability reinforcing Chemring’s position as a key supplier to NATO, and “positioning the group well for the future”.
The outlook is robust, and the directors have an ambition to increase annual revenue to around £1bn by 2030. To put that goal in context, the firm achieved revenue of £473m in the trading year to October 2023. So, the forecast is bullish, and the stock has the potential to make a decent long-term investment.
However, the rest of today’s figures are a mixed bag. Revenue rose 8% year on year, but underlying diluted earnings dropped 11%.
Net debt rose 201% to just over £75m, driven by the directors’ decision to invest more into operations. However, that didn’t stop them pushing up the interim dividend by 13%.
Meanwhile, the company’s improving outlook has been noticed by the market. The share price has risen by around 49% since autumn 2023.
City analysts have pencilled in an advance in normalised earnings of just over 10% for the next trading year to October 2025, and they expect a similar rise in the dividend.
The valuation looks up with events
With the share price near 386p and against those estimates, the forward-looking earnings multiple is just over 17, and the anticipated dividend yield is just under 2.3%.
That valuation compares to the FTSE All-Share index at just over 12 with a forward yield of around 3.7%.
So Chemring isn’t cheap and has likely been caught up in the defence theme. Investors have been piling into stocks in the sector. There’s some risk in that situation for shareholders. If the company fails to meet its estimates, the stock price may fall.
If anything changes in the general geopolitical outlook, governments may reduce their defence spending and that could pull the rug from under the company’s bullish assumptions.
Nevertheless, Chemring has been posting consistent growth in earnings since at least 2019. It also operates in a buoyant sector with a positive outlook. Therefore, the stock looks worth further research and consideration for potential inclusion in a long-term-focused, diversified portfolio.
