Investors’ Chronicle: Chemring, RWS Holdings, Wincanton

BUY: Chemring (CHG)

Order intake more than doubles to £358mn, but higher capex will weigh on short-term earnings growth, writes Michael Fahy.

Although Chemring’s full-year numbers came in slightly ahead of expectations, the muted reaction from investors is somewhat understandable.

Although the company reported an 18 per cent increase in revenue and a 17 per cent jump in underlying pre-tax profit, these were against a revised set of figures that don’t include its explosives hazard detection business, which has been discontinued following a review that concluded there weren’t enough decent opportunities for it to pursue.

Almost £50mn of impairments were recorded against its chemical and explosive hazards detection arms, which was the main factor behind an 89 per cent slump in net profit, to £5.4mn.

Aside from this, though, Chemring’s prospects continue to look bright. “The geopolitical turbulence we are experiencing has resulted in many countries reassessing their defence and national security priorities and associated budgets,” chief executive Mick Ord said.

In Chemring’s case, this translates into higher demand for its energetics products, which are used in missiles and munitions — of which there is currently a major shortage.

Order intake for Chemring’s countermeasures and energetics arm increased by 52 per cent to £541mn, pushing its order book up to £751mn, which is well above the £400mn or so it was averaging prior to last year. Countermeasures and energetics now has a book-to-bill ratio of 189 per cent, with most of its expected revenue for the next three years already in the bag.

Little wonder, then, that Chemring recently announced plans to spend £120mn to increase capacity at its three energetics factories in Norway, Scotland and the US, which Ord said would bring in an extra £85mn of revenue and £21mn of operating profit a year from 2027 onwards. However, this will mean capex will remain elevated until then — at £70mn for 2024, £60mn for £2025 and £50mn for 2026, which includes £20mn a year of maintenance capex.

Prospects also look decent for its sensors and information arm, whose 55 per cent revenue growth was driven largely by the Roke software and technology business.

Broker forecasts for this year are fairly are muted given the heightened capex spend — FactSet consensus estimates are for 3.5 per cent earnings per share growth. Yet increased orders should start to translate into meaningfully higher profits from 2025 onwards and with the shares currently priced in line with their five-year average in terms of both forward earnings and book value, we still think they look like decent value.

SELL: RWS Holdings (RWS)

Demand for specialist translation services is under pressure, writes Jemma Slingo.

RWS Holdings has blamed its poor performance on “temporary headwinds” several times this year. However, investors will be getting increasingly nervous about the underlying health of the language services group, which translates things like patents and technical documents. Organic constant currency revenue declined by 6 per cent in the 12 months to September, reflecting “reduced client activity in a challenging market environment”. Meanwhile, adjusted profit before tax fell by 11 per cent to £120mn.

The adjusted figure paints a far cheerier picture than the statutory numbers, though. RWS reported a statutory loss before tax of £10.9mn, driven by a £62.4mn impairment charge relating to its technology division and £22.6mn of restructuring and integration costs. 

None of RWS’s four divisions — language services, IP services, regulated industries, or technology — achieved revenue growth on a constant currency basis, which management attributed to “dampened demand and increased price pressure in some of our end verticals”. 

Management is confident that demand will return “in due course” and insisted that artificial intelligence “is not a headwind” but a benefit. The group has also identified £25mn of cost savings to support profitability next year and, despite the turbulence, is still making plenty of cash. The dividend has just been hiked for the 20th year in a row.

The group’s cash conversion did fall from 93 per cent to 74 per cent in the period, however, as a result of tax payments and investment in research and development. Meanwhile, there is little visibility over when sales will pick up again, and little clarity about the impact that AI will ultimately have on demand for specialist translation services. 

For several months, we have been waiting expectantly for RWS’s turnaround plan to take effect. We are still waiting on any meaningful improvements.

BUY: Wincanton (WIN)

All of the London-listed logistics companies have been snapped up in takeover deals — apart from one, writes Jemma Slingo.

The London Stock Exchange used to be home to a number of logistics companies. Since 2022, however, Clipper Logistics, Xpediator and — most recently — DX have been snapped up by private equity (PE) firms and international groups keen to get a foothold in the UK. 

Buyers have been willing to pay a good price. GXO stumped up almost £1bn for retail specialist Clipper, representing a 32 per cent premium to its three-month average share price and 30 times consensus forecast earnings. Meanwhile, HIG Capital has offered £315mn for DX, a 30 per cent premium to its highest closing price between November 2015 and September 2023. 

The DX deal is still subject to shareholder approval. Assuming it goes ahead, however, there will be just one pure-play logistics company left on the London market: Wincanton.

The company has only just made it back to the 300p level after the loss of a significant HMRC contract triggered a sell-off in March. This was a blow after a good 2022; its financial position was improving and there was strong demand for its services against a backdrop of supply chain disruption. 

The loss of the HMRC project dented trading almost immediately. In the first half of full-year 2024, e-fulfilment revenue grew strongly, but the public and industrial division struggled and total sales fell by 8 per cent to £695mn. 

Inflation also knocked the income statement this year, largely through labour costs. These account for 60 per cent of total operating costs and were up 6 per cent year on year in the first half. In aggregate, the group has experienced cost inflation of 3 per cent in the first half of 2023.

According to HSBC forecasts, both sales and profits will remain below pre-pandemic levels for the foreseeable future. And yet, many analysts are feeling optimistic about the group’s prospects.