Defence company Chemring (CHG) suffered a freak accident in its countermeasures factory in June, killing one man and seriously injuring another.

The company initially said that the explosion in Salisbury would dent full-year profit by between £10m and £20m. On Tuesday, Chemring has confirmed that the impact on profits will fall somewhere between the aforementioned range, with its house broker Investec forecasting a £16m decline in earnings.

The market seems relieved, Chemring’s share price bid up 1.4% to 200p. When the company first reported the accident, its share price crashed by almost 20%.

MOVING ON UP

As Shares has previously reported, Chemring is keen to ‘move away from short-term commodity products’ or ammunition in other words. This managed decline in energetics is being replaced by more focus on its countermeasures and sensors division.

Unfortunately the accident took place in a countermeasures factory, although the company is working with regulators to determine the cause of the explosion. Orders from this division remain robust with the US Department of Defense being a key client for Chemring, making up for the bulk of the £78m in orders between May and August. Given this division achieved revenue of £129m for the full year 2018, this four month sales figure is encouraging.

Chemring has also won significant awards in its sensors division including $24m for part of the Enhanced Maritime Biological Detection program and a $93m deal for its ongoing Husky Mounted Detection System.

THE ANALYST'S VIEW

James Zaremba, analyst at investment bank Barclays, sees Chemring as being at an ‘entry point for [a] self-help story’. He adds that the share price is still off by 17% since to accident and he believes this is an overreaction.

Using Investec’s forecasts, Chemring trades on 17.9-times prospective 2019 earnings. This represents quite a discount to its sector although this may change as Chemring shifts from bullets to sensors and other high margin products.

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Issue Date: 04 Sep 2018