It didn't come as much of surprise to Chemring (CHG) CEO Michael Flowers to hear that shares in the defence specialist had declined by 6.8% to 167.75p on the back of disappointing full-year results and the announcement of an £80.8 million rights issue.

Flowers is probably right to take a stoical view of this hit to share price. After all, with the UK market officially entering bear territory on Wednesday (20 January) and Chemring offering a decidely downbeat (albeit previously trailed) assessment of its full-year 2015 and a rights issue to boot, one might even surmise that it could have been a whole lot worse. All the more so when one considers that Chemring has also slashed its dividend and earnings per share are down more than 30% to 8.1p.


'It's not where I wanted to be and it's not where we wanted to be,' admits Flowers speaking to Shares after the £318.8 million cap's full year results and rights issue announcement.

Shares in the defence specialist have declined 29.3% over the past 12 months and the stock is already down 14.1% on the year-to-date. Much of the 2015 decline is back-loaded towards the final quarter when Chemring's 27 October update informed investors that the 40mm ammunition contract announced on 14 September was likely to be delayed. Revenue from this contract – for a US customer placng the ordnance with a Middle-eastern state – would have gone some way towards offsetting the loss of a US government contract for non-standard ammunition.

Flowers assures investors that multi-year revenues associated with the 40mm contract are expected to commence in the first half of full-year 2016, 'once the cash advance payment is received from our customer, and this contract is expected to provide a significant contribution to full-year 2016.' The CEO refused to be drawn into a guessing game as to which Middle-eastern country would take delivery of said ordnance but did venture that it was not 'one of the oil-heavy countries'.

The rights issue – while probably not immediately helpful to short-term share price – should go a long way towards shoring up a balance sheet that has seen long-standing debt convenants becoming increasingly onerous and it's clear that the board is keen to move away from quarter-by-quarter management of these arrangements.

One had to leaf all the way through to page 17 of the results announcement to find out that Chemring's board would not be recommending a final dividend for 2015. The total full-year dividend therefore comprised of interim dividend of 2.4p per share compared to full-year 2014's 4.1p.

That said, the Board does intend to propose a final dividend for full-year 2016 (assuming it is prudent to do so), and to continue paying dividends thereafter.

Liberum maintains a hold recommendation but its target price is under review: 'Reducing debt allows focus on growth in an improving defence budget environment but risk remains due to ‘delivery re-phasing’ and the H2 bias,' says analyst Ben Bourne.

Issue Date: 21 Jan 2016