Canaccord upgrades Chemring to 'buy' after full year results

Canaccord Genuity on Monday upgraded its rating on Chemring to ‘buy’ from ‘hold’ and raised the target price to 210p from 160p.

On 19 January, Chemring reported a 26.5% jump in full year revenue to £477m, driven by a weaker pound and the ramp-up of the defence group’s F-35 stealth fighter programme. Underlying profit surged 71.7% to £34m.

“Chemring's fiscal year results demonstrated a level of progress and stability that the market has been waiting for,” Canaccord said.

“Sales were +17% organic, operating cash conversion was 123% and the highest in a decade, the dividend was reinstated, and expectations for fiscal year 2017 unchanged.”

Canaccord also noted Chemring’s net debt almost halved to £87.6m, giving a debt-to-earnings ratio of 1.15 times – the strongest since 2009.

Last January the company launched a £80m rights issue to cut its debt, which Chemring said was weighing on the business.

Canaccord said it also welcomes the group’s restructuring initiates and the Operational Excellence Programme implemented in late 2016, which aims to improve manufacturing efficiencies, safety, new product development and procurement.

“There is already tangible evidence that these initiatives are translating into improved performance too; in FY16 lost time incident incidents were the lowest on record, working capital significantly improved, and operating margins increased 1 percentage point,” the broker said.

Looking ahead, the quality of revenues going forward is “encouraging” as it is no longer reliant on one-off contract wins to meet guidance. Canaccord expects year-on-year sales growth, underpinned by programmes such as F-35, the US Programs of Record, and large ammunition contracts in Energetic Systems.

The broker added that a strong balance sheet “provides further investment optionality going forward and although early days we think efficiency/safety improvements could be more incremental to margins than current guidance”.

While global defence remains “uncertain”, the short cycle nature of Chemring's business means any increase in spending is likely to impact the group faster than some peers.

“We are increasingly confident in Chemring's ability to meet guidance and whilst demonstrating a sustained period of delivery will be taken well, there are further catalysts such as the NGCD programme, follow-on 40mm orders, and incremental efficiency improvements, that can drive growth,” Canaccord said.

Shares fell 1.80% to 191.25p at 1028 GMT.