A post-close update from defence firm Chemring (CHG), which manufactures decoy flares, detectors for improvised explosive devices and ammunition, is cheered by investors as it announces plans to divest as-yet-disclosed non-core business units. The shares rise 11.1% to 215.9p.


This positive share price movement claws back some of the lost ground from last month's part US government shutdown-related profit warning (11 Oct) – the market perhaps reassured the situation has not deteriorated any further.


The company had cut its operating profit forecast for the year to 31 October 2013 by £8 million on 'quality and production issues' and unfavourable movements in exchange rates – something we discussed in detail here.


This represented the first downward revision in expectations under chief executive officer Mark Papworth who replaced David Price in the role in November last year after a series of warnings from the company.


Today's update indicates 2013 numbers will meet the revised expectations. Sales in the fourth quarter total £185 million, a year-on-year drop of 24% and the order book shrinks 8% from the same period in 2012 to £702 million.


Net debt stands at £249 million after strong cash generation in the last three months of its fiscal year – with a further £14 million received since year-end from delayed Middle East deliveries – and the promised divestment is expected to result in an 'improved financial position for the group'.


Investec moves from 'hold' to 'buy' with a price target of 260p and comments: 'High risk but potentially significant returns available.'


Liberum Capital is more cautious, reiterating its 'hold' recommendation, and says: 'A positive relationship with debt holders is emphasised. Good progress with the strategic planning process. A number of business units have been identified for disposal. This is a positive statement but risks remain elevated.'

Issue Date: 25 Nov 2013