A serial warner in recent years as demand for its countermeasures and munitions products was hit by the US drawdown of troops from Afghanistan and Iraq, the company needs a strong second half just to hit reduced guidance, raising the prospect of a further warning down the road.
The worse than expected six months to April comes despite a 11.4% year-on-year increase in sales and reflects later than expected commencement on a 40mm ammunition contract in the Middle East, bias towards lower margin products and short-term issues on certain other contracts.
Investment bank Barclays, which is ‘underweight’ the stock comments: ‘Recent precedent does not provide much comfort, with warnings in four of the last five years towards the end of the fiscal year when much was expected in H2.’
Investec retains its ‘buy’ recommendation, noting: ‘The longer term outlook is unchanged with expected progress made on the all-important US Programs of Record. These programs offer material revenues over the next decade and Chemring is well placed to be the primary provider.
‘This combined with operational changes (including site closures) should see good profit progression from FY17E, a view which is unchanged despite the setback today.’