Gloomy outlook sends Chemring plummeting

Investors sent shares in Chemring Group (CHG) tumbling more than 12% as it published its preliminary results for the year ended 31 October and warned that 2012 would "not be any easier" than 2011.

The defence manufacturing company posted revenues and pre-tax profits for the year up 25% and 6% respectively, despite stating that "increasing deficits" and "lower economic growth" had affected defence procurement, "leading to volume reductions and delays".

Late last year, the company said revenues for the year would come in around 5% lower than the board's expectations, due to delays in contracts it expected to be awarded last October which slipped into November.

"The continuing problems of the eurozone and the impact of possible sequestration in the US indicate that our traditional markets will not be any easier this year," said chairman Peter Hickson.

The US has capped its military budget at last year's levels for 2012, significantly less than the defence department requested, as well as introducing a budget control act to curb public sector spending over the next 10 years.

However, Hickson attempted to reassure investors by revealing that the company was "actively seeking" more business from outside the eurozone and the US, with 44% of the current order book emanating from non-NATO markets, compared with 33% at the same time last year.

Paul Brant, analyst at Collins Stewart, agreed. "We think the medium-term growth story remains intact, despite the outlook for 2012 being somewhat depressed," he commented, adding that 2012 would be a trough as revenues from Afghanistan and Iraq draw down and growth in non-NATO sales, together with new product developments, begin to plug the deficit from 2013.

"Next year we expect material sales from India and potentially Brazil, whilst joint ventures are also planned for Turkey and South Korea, both key growth markets for defence. A promising new product set should also aid organic growth beyond 2012," stated Brant, reiterating his 'buy’ stance on the stock.

Additionally, Chemring increased its dividend by 25% as it aimed to bring down its dividend cover from around four times to around three times.

And return to shareholders was given another boost as the company said that it would seek approval at the forthcoming annual general meeting to "renew our authority to buy back shares" to the tune of £50 million.

"We have concluded that we should consider returning surplus capital to shareholders whilst maintaining the strength of the balance sheet," Hickson commented.

Jim Levi pinpointed Chemring as a stock to follow in his December column. Read: Shares to buy, hold and sell, for his view on on the defence contractor.