Chemring: UK defence company has advanced far enough

The specialisations of UK defence group Chemring have long included decoy systems used to lure missiles away from warplanes. Its ability to attract investors has been less impressive. But like many defence manufacturers, its fortunes have been revived by war in Ukraine and the return of conventional conflicts as a threat in the developed world.

The group reported full-year results this week. In the past it was beset by a factory explosion and an abortive investigation by the Serious Fraud Office. This time it has been hit by contract delays in the US, as some competitors have.

Smaller UK defence companies were popular takeover targets for US acquirers when leveraged finance was more abundant and political resistance lower. Their conquests have included Cobham, an in-flight refuelling expert, sonar buoys expert Ultra Electronics and Meggitt, which was something of a ragbag of assets.

Investors should not rule out the possibility of a bid for Chemring. But the probability of this is lower than it was. The company wishes to expand via acquisitions itself, with the US a likely target market. But this would probably only be via small, bolt-on purchases.

Chemring’s profits have been squeezed by wage and energy inflation. The group was nevertheless able to report a near 30 per cent rise in order intake in the year to the end of October to £551.5mn. Underlying operating profit was up 11 per cent to £64mn.

Chemring, which has a market worth of some £850mn, trades on a forward price-to-earnings ratio of about 16. That is slightly higher than BAE Systems, which should still be preferred as a medium-term investment prospect due to its superior scale. Chemring’s rating is twice that of Babcock, which derives a lot of its income from lower-margin facilities and site management.

Chemring has advanced as far as it is likely to at present. The foresight of the business appears suspect given the resurgence of conventional warfare. The company sold its ammunition divisions a few years ago. The Ukraine war means there is a now a shortage of the stuff.