Analysts continue to downgrade forecasts for defence firm Chemring (CHG) - taking their cue from the downbeat guidance which accompanied this week's full-year results (18 Jun) - but the market appears happy to look through to an eventual recovery with the shares today up 1.6% at 281.3p.

In fact after an initial fall in response to the numbers on the day, the stock has recovered all the lost ground and year-to-date is ahead more than 20%.


CHEMRING GROUP - Comparison Line Chart (Rebased to first)


The company - which manufactures decoy flares, detectors for improvised explosive devices and ammunition - is under new management after issuing two profit warnings last year and seeing potential private equity bidder Carlyle walk away.

It has been badly hit by spending cuts in the US – with almost $60 billion likely to be knocked off the Department of Defense budget this year and combat operations winding down in Afghanistan.

The first job for chief executive officer Mark Papworth, who took the helm in November last year, was to reduce the cost base to an appropriate level. Expected restructuring costs of £15 million should deliver savings of £10 million from next year onwards.

Papworth explained to Shares that he is working on a medium-term plan for the business, which could include targeting new markets, having sanctioned this initial action.


Training with flare


For the six months to 30 April, Chemring reported a slump to a pre-tax loss of £8.8 million from a profit of £19.7 million. In the wake of the results broker Liberum Capital, which has a 'hold' recommendation on the stock and a price target of 270p, cut its October 2013 earnings per share (EPS) estimate 7% to 24p and its October 2014 EPS forecast 2% to 26p. Espirito Santo is more bullish on the stock, with a 'buy' recommendation and 360p target price, but today cut its EPS forecasts for the next three years by 7%, 9% and 4% respectively.

Issue Date: 21 Jun 2013