Chemring Revisited

Thursday, Jan 03 2013 by
Chemring Revisited

This is a short post following up on a write up I did a couple of months ago on the FTSE 250 defence company, Chemring (LON:CHG) .

As shown in the article the company had enjoyed several years of rapid growth until 2012 which saw a drop in profits as a result of operational issues, order cancellations and delays. It was also a year which saw the departure of its FD and its CEO as well as a takeover approach which was subsequently aborted.

But the key question for me was whether the valuation adequately reflected these issues and whether the dividend looked sustainable given the trailing yield approaching 6%. In light of recent earnings downgrades I now think this needs to be revisited.

At the time I wrote the article the company’s own website gave analysts’ EPS forecasts for 2012 of 54p and so taking into account the 13p downgrade announced in the 1st November trading statement I had assumed an EPS of around 40p for 2012, down from 52p in 2011. That now appears to be way off the mark. Not only were some of the analysts’ forecasts well out of date, but I don’t think the company had kept its own website up to date either which is disappointing. If there’s one place where you expect to get some reliable data it is from the company itself, but in this case sadly not, and looking at the relevant page today it appears that the data has gone missing entirely.

Given that the year end was 31st October the recent analysts’ forecasts should more accurately reflect the guidance from the company for the year. These now show a forecast EPS for 2012 of 28.9 which is a huge 45% fall on last year’s underlying figure of 52.1p. That’s a lot worse than the 23% fall at the half year when the company also reported a record order book of £1bn.

Sometimes Mr Market’s fears can be irrational but in this case I think he got it about right. At the current share price of 238p the P/E ratio of just over 8 for last year is probably a fair reflection of where the company is. But if an EPS of around 28p is correct, I think that casts some serious doubts over the sustainability…

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Chemring Group PLC is engaged in offering solutions to protect defense and security markets. The Company operates through three segments: Countermeasures, which is engaged in the development and manufacture of expendable countermeasures for air, sea and land platforms, and land-based electronic warfare equipment; Sensors & Electronics, which is engaged in the development and manufacture of improvised explosive device (IED) detection equipment, chemical and biological threat detection equipment, IED electronic countermeasures, network protection technologies and explosive ordnance disposal equipment, and Energetic Systems, which is engaged in the development, procurement and manufacture of signals and illumination devices and payloads, cartridge/propellant actuated devices, pyrotechnic devices for satellite launch and deployment, missile and ammunition components, propellants, warheads, fuses, separation sub-systems, actuators and energetic materials. more »

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1 Comment on this Article show/hide all

Miserly Investor 3rd Jan '13 1 of 1

Another big rise for CHG today following the announcement of their new CFO here:

At the current price of 254p the P/E is now around 9 and so given the potential for a dividend cut I would now say it is fairly valued. I see that Woodie may be taking the opportunity to reduce his holding which was almost 30% - see this afternoon's announcement here:

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