Berenberg reiterates 'buy' rating on Chemring

In September, Chemring said there was a risk that roughly £25m of countermeasures shipments, approximately 5% of group revenues, might be delayed until the 2024 trading year due to a third-party supplier quality issue.

Delivery was contingent on receiving approval from the US Department of Defense to ship the items, once it had approved the quality of raw material provided by a supplier. Chemring has already manufactured the countermeasures and revenue will be recognised upon delivery.

However, while Berenberg said these issues were now "largely in the rear-view mirror", Chemring's shares were still trading 10% below their level before the September trading update, underperforming peers by a similar amount. Berenberg said it thinks this "ignores the strong underlying performance" as noted in the trading update, after putting the timing issue to one side.

"The outlook for Roke and Energetics remains buoyant (circa 60% of group revenue combined), and an important programme milestone has been reached on a US biological detection contract. Following the share price underperformance, valuation is attractive with the shares trading on 12.2x P/E for an 11% EPS CAGR over 2024-27. We think the share price weakness offers a good entry point," said Berenberg.

"We raise our FY 2023 estimates and lower our FY 2024 estimates as we now assume the majority of the shipment is delivered in the current financial year, having previously assumed FY 2024. This brings our FY 2023 estimates back to where they were before the September trading update, while we raise our outer-year EPS estimates due to a slightly lowered GBPUSD FX rate."

Reporting by Iain Gilbert at Sharecast.com