Chemring Group plc (LON:CHG) has announced that trading in the period to 31 October 2023 progressed as planned with the outturn for the year ending 31 October 2023 expected to be in-line with Board and analyst expectations*.
Net debt at year end is expected to be approximately £14.4m (2022: £7.2m). Strong operating cash conversion of 90% of EBITDA (three year average: 101%), has been used to fund growth opportunities, both organic and bolt-on, increase dividends by 20%, and deploy £9m into the £50m share buyback programme announced on 1 August 2023.
The Group continues to see robust market conditions, with increasing customer demand for its technology-driven solutions and a resurgent demand for traditional defence capabilities. This robust growth outlook is expected to be maintained over the long term.
Energetics Contract Awards and Further Capacity Expansion
The Group continues to experience significant increases in demand for energetic materials and devices, with its Norwegian-based subsidiary Chemring Nobel winning over £40m of orders in the final month of the year, and its US-based subsidiary Chemring Energetic Devices winning a $46m order from United Launch Alliance (“ULA”) in support of their Vulcan Launch Vehicle.
Considering the increased levels of demand for energetic materials and the strong organic growth opportunity this presents, the Group has decided to invest a further c£30m in increasing the capacity of Chemring Nobel. This investment, which is in addition to the c£90m capacity expansion plan across the Group’s three Energetics businesses that was announced in June 2023, is expected to deliver c£25m of incremental annual revenue. The total investment in increased capacity in the Group’s three Energetics businesses over the next three years is expected to be c£120m, which will generate increased revenue of c£85m and increased operating profit of c£21m.
Strategic Review of US Sensors
With both of the Group’s US DoD sole-source biological detection Programs-of-Record now in production phases**, and following the US Army’s decision to curtail production of the Husky Mounted Detection System (“HMDS”) and accelerate the transition of the program into a sustainment phase, and our assessment that it is no longer probable the Group will proceed to the next phase of the competitive Aerosol and Vapor Chemical Agent Detector (“AVCAD”) program, the Group has conducted a strategic review of its US Sensors business and concluded that a focus on biological detection and security markets presents the best opportunity to maintain strong margins and deliver growth.
As a result, the Explosive Hazard Detection (“EHD”) business will be treated as a discontinued operation in 2023 with a non-cash impairment of the goodwill associated with its acquisition in 2009, and other assets, totalling £31m being recorded. Also, a non-cash (pre-tax) impairment of the previously capitalised AVCAD development costs and other assets associated with the program totalling £18m has been recorded as a non-underlying item; given its competitive nature the Group had not included any AVCAD program revenues in its forecasts.
The Group has moved quickly and decisively to reposition and reshape its US Sensors business to ensure sustainable competitive advantage in its targeted biological detection and security markets.
FY23 Results
Chemring’s FY23 results are scheduled to be announced on 12 December 2023.
* The Group believes the consensus of analyst forecasts for adjusted operating profit for the year ended 31 October 2023 is £67.0m.
** The Enhanced Maritime Biological Detector (“EMBD”) is now in full rate production and the Joint Biological Tactical Detection System (“JBTDS”) is in low rate initial production.
