Chemring Group – recovering quickly from a disaster hit 2018
Last year was a bad one for Chemring Group (LON:CHG) but this year will see it bounce back impressively.
Employing approximately 2,500 people worldwide, Chemring is a global business with production facilities in four countries, meeting the needs of customers in more than fifty countries.
The Group specialises in the manufacture of high technology products and the provision of services to the aerospace, defence and security markets and it is organised under two strategic product segments: Sensors & Information and Countermeasures & Energetics.
Chemring has a diverse portfolio of products that deliver high reliability solutions to protect people, platforms, missions and information against constantly changing threats.
It operates in niche markets and, with strong investment in research and development, it has the agility to rapidly react to urgent customer needs.
In the Countermeasures business the Company is the Number One global supplier with a market share of more than 50%.
Chemring is the world leader in the design, development and manufacture of advanced expendable countermeasures and countermeasure suites for protecting air, sea and land platforms against the growing threat of guided missiles.
The Group has a broad product range including conventional flares, advanced flares, special material decoys, chaff and naval countermeasures.
Its countermeasures protect aircraft and ships from guided missile attack by decoying the threat away from the platform they are protecting. Its businesses combine a deep understanding of platform signatures, missile seekers and chemical formulations to develop new decoys against new threats.
Chemring Countermeasures USA consists of Alloy Surfaces, based in Philadelphia, and Kilgore Flares, based in Tennessee. Alloy Surfaces is a leading developer of special material decoys for the US Navy, Marine Corps, Army and Air Force, with exports to the UK and Australia. Kilgore Flares operates a high-volume manufacturing facility making conventional and advanced flares, including flares for the F-22 and F-35.
Here in the UK, Chemring Countermeasures manufactures advanced expendable countermeasures for air and sea platforms. Its aircraft products include conventional and advanced flares and chaff. The Company’s naval products include infra-red and radio frequency decoys and the CENTURION trainable naval decoy launcher.
In Australia the Group develops and manufactures aircraft countermeasures, pyrotechnics, and counter‑IED and electronic warfare solutions.
The Energetics side has various niche positions on long‑term programmes. Its products harness the ability of energetic materials to very rapidly release energy to perform any of a number of functions, from propelling an aircraft ejection seat to separating satellites in space.
The Group’s Sensors products include world-leading systems for detecting improvised explosive devices, chemical and biological agents, and core technologies for detecting, intercepting and jamming electronic communications.
The Group is also a leading contract research and development supplier, trusted by government and industrial partners worldwide to solve the most technically challenging security-critical issues.
Its sensor systems and services protect people, platforms and information by detecting threats with a very high degree of confidence. Its targets include explosive, chemical, biological, radio and cyber threats, which are all becoming more complex, driving a constant need to engineer improved technological solutions to meet customer needs.
Based in Virginia and North Carolina, Chemring Sensors & Electronic Systems develops and manufactures ground penetrating radar, IED detection systems, and chemical and biological threat detection systems.
The Group’s Roke operation is a technology company that provides electronics research, development and engineering services, and cyber-security solutions for UK Government agencies and prime contractors.
Chemring Technology Solutions is the Group’s centre of excellence in land electronic warfare. It also develops and manufactures IED detection and neutralisation systems, including vehicle-mounted and hand-held sensors, disruptors and initiation systems.
Globally the Group’s customers are National Defence and Security agencies, and Defence prime contractors. Its home markets in the UK, US, Australia and Norway represent some of the most demanding users in the world, with well-funded militaries and international credibility, which helps achieve export sales.
The US is the world’s largest defence market and Chemring’s US businesses are well positioned to benefit from this growing defence budget.
The UK is Europe’s largest defence market. Chemring sells directly to the MOD and security agencies, as well as to prime contractors.
Last year the Group had a number of hassles to deal with, which impacted its results.
On 10 August 2018 an incident occurred in a flare mixing building at the Group’s UK Countermeasures site in Salisbury. It resulted in the death of one employee and serious injury to another. The site was immediately shut down and an investigation launched into the cause. A phased re-start of the CCM UK site started in September, with the shipping of finished goods and production of non-Energetic products.
Last year also saw some equipment failures at plants in Norway and Tennessee, which are being coped with and remedied.
Sales in 2018 were £297m upon which the Group made a £22m loss. However, for this year the average consensus, across seven analysts who research the Company, suggests £350m of sales to end October 2019 should generate pre-tax profits of around £40m, worth 6.50p in earnings, covering a dividend of 3.3p.
For 2020 revenue of £380m could see pre-tax profits of over £50m, about 10p in earnings and 4p in dividend.
The 2021 years estimate is of £400m sales and £60m of profits, with earnings of nearly 12p per share, able to cover a 4.5p dividend.
With 282m shares in issue and a market price of 177p that values the company at £499m. Institutions in the stock include: Invesco, Schroder, UBS, Merian, FIL, JO Hambro, Jupiter, Majedie, and Investec.
And who can blame them for investing in such an undervalued world leading company?
I am putting out a 300p Target Price by end 2020.