Berenberg ups target on Chemring as risks around Pentagon programmes 'fade'
Analysts at Berenberg revised their target price for shares of Chemring higher, citing the company's better-than-expected first half numbers and an improved outlook for US defence spending.
Aerospace and Defence
10,419.20
15:10 19/04/24
Chemring Group
344.50p
15:09 19/04/24
FTSE All-Share
4,280.47
15:10 19/04/24
FTSE Small Cap
6,332.33
15:10 19/04/24
Regarding the latter, the German broker said the risks around large and long-term Pentagon programmes that were in the sole-source development phase were "continuing to fade".
Furthermore, if those were worth about 19% of the company's fiscal year 2021 group earnings, then the new prospective programme announced at the half-year stage might add another 10% to earnings for that year, they said.
As well, "the outlook for the US market (c59% of group sales) has significantly improved following the enactment of defence budget legislation under President Trump, for which we believe Chemring’s portfolio is well positioned, particularly in the Countermeasures and Sensors divisions," Berenberg said.
The broker lifted its estimates for the company's earnings per share by 6% for each year between 2018 and 2020, with higher growth potential and improved margins accounting for four percentage points-worth of the upwards revisions each, offset by a 2% drag from a slightly higher tax rate.
Although Chemring stock was up by 24% year-to-date, that was from "depressed levels", the broker explained, and there was still potential for additional upgrades as a result of "significant" near-term contract opportunities.
At a 2019 price-to-earnings multiple of 15.7, the shares were trading in-line with the sector average for the UK defence sector.
However, on an EV/EBITDA basis they were changing hands at 8.8 an 8.4 times, for discounts of 14% and 16% versus the sector, respectively.
For all of the above reasons, Berenberg marked up its target price for Chemring's shares from 228p to 255p, while sticking ith a 'buy'.