Is it time to buy this cheap turnaround play?

Shares in Chemring (LSE: CHG) are rising today after the embattled defense business issued an upbeat set of interim results. The results show that the company finally seems to be getting back on track after some serious wobbles. 

Over the past five years, its shares have fallen 37% and the company has been forced to ask shareholders for extra cash to remain afloat. But it now looks as if Chemring is starting to move on from these issues. This morning’s release shows that revenues for the six months ending April grew to £249.6m, up from £180m in the same period last year. Statutory losses came in at £6.8m, better than the loss of £16.8m recorded last year. On management’s preferred measure of profitability, underlying profits, income hit £17.2m, up from £3.8m. These figures exclude discontinued operations and exceptional items. 

Even though efforts to restructure the business are responsible for some of the revenue and earnings growth, the company also received a boost from sterling gains and a tax credit. On a constant currency basis, revenue for the first half would have been £225.4m and operating profit would have come in at £14.8m. The company also received a tax credit, on adjustments, of £5.8m. 

Still, despite these accounting impacts that are flattering the figures, management also remains upbeat for the rest of the year. Full-year forecasts remain unchanged, and approximately 85% of expected second-half revenue is in the company’s order book.

Commenting on today’s results, CEO Michael Flowers said: “In the first half of 2017 the group has continued to build on its H2 2016 performance, with solid order intake and revenue delivery from its operations. The consistency of manufacturing operations across all sites continues to improve, delivering more predictable revenue flow and improved margins.”

Making progress

All in all, based on today’s first half results, it looks as if Chemring’s recovery is underway, but the company still has plenty to do before it can convince the market that it is once again a safe investment. 

City analysts are expecting the group to report a pre-tax profit of £40.1m for the fiscal year ending 31 October 2017 with earnings per share of 11.4p, giving a forward P/E ratio of 16.4. This multiple seems relatively expensive considering Chemring’s recent troubles. What’s more, for the following fiscal year analysts are not expecting much in the way of growth. An earnings per share gain of 9% is expected for the financial year ending 31 October 2018.

Nonetheless, if the company can return to its former glory there could be huge gains to be made here. At its peak in 2012, Chemring earned just under 25p per share and if they return to this level and the shares maintain their current mid-teens multiple, Chemring could be worth as much as 410p per share, a gain of 106% from current levels.

The fastest way to a million

Chemring could double from current levels but the one thing the company lacks is a healthy dividend yield. Dividends are essential for building wealth over the long term and with a turnaround, dividends can dramatically improve your returns.

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