Jefferies initiates coverage on Chemring at 'buy'

Analysts at Jefferies initiated coverage on advanced technology products and services firm Chemring at 'buy' on Friday, citing a "compelling growth story".

Jefferies stated the appealing growth story at Chemring was driven by its Roke units exposure to the cyber-security and AI/Machine Learning market that will improve the overall quality of earnings and positions the group at the leading edge of modern-day security and defence.

The analysts, which also hit the stock with a 370.0p target price, pointed out that Chemring had undergone "a significant restructuring", which had taken the best part of a decade to complete.

However, Jefferies stated the resultant portfolio of countermeasures, sensors, and cyber technology exposed the group to select growth and niche markets, which, in its view, greatly improved its quality of earnings.

Jefferies said: "Based on JEFe (which sit above consensus), the shares trade on an ann. FY22F PER of 16.0x and EV/EBITA of 13.1x, which look cheap vs. UK & overseas peers. We value the group on a SOTP basis (using ann. FY22F forecasts), which is in line with our approach across the sector, with a discrete valuation for Roke (39% of our EV).

"At our PT, Chemring would trade on a FY22F EV/EBITA of 16.7x, which is higher than recent multiples, but as ROIC has recovered from an average of 5% (FY12 to FY19) to 11% (FY21F), this re-rating is justified in our view."