The turmoil at military countermeasures specialist Chemring (CHG) continues as it reports a widened pre-tax loss of £72 million (2013: £9.2 million) for the six months to the end of April and chief executive Mark Papworth departs after just over 18 months in charge. The shares slump 6.6% to 193.75p.
The company has been hit by a series of profit warnings since 2012 as it contends with a slowdown in defence spending in its core Western markets. We outlined our caution on the stock in a look at the wider sector last month. Papworth, who has overseen a significant restructuring of the business including the £138 million sale last month (27 May) of its European munitions business, is to be replaced by Michael Flowers who currently heads up the countermeasures division and joined in 2006.
A 22-year veteran of the Australian army chairman Peter Hickson says Flowers is better positioned thanks to his 'extensive knowledge and understanding of the defence markets in which we operate'. This may put paid to aspirations outlined by Papworth to apply the group's technology and expertise in other markets.
Looking at the interims in more detail, if discontinued operations are stripped out the company actually generated a pre-tax profit of £5.1 million against a loss for the same period last year of £12.7 million. Net debt is also reduced through the period - from £275.1 million to £229.2 million – and this is prior to the receipt of the proceeds from last month's divestment. Less positively the order book falls 6.7% to £277.4 million for the six month stretch.
Investec is positive and reiterates its buy recommendation (though cuts its price target from 260p to 250p). Analyst Chris Dyett comments: 'We view the appointment of a new CEO, Michael Flowers, as the next step in the turnaround. The new CEO will likely build on restructuring and rightsizing initiated by his predecessor to move Chemring forward.'
Taking the opposing view Westhouse Securities restates its sell advice and 150p price target. 'Overall we see these results as neutral for Chemring – the upside looks potentially to be more about phasing than secular improvement and the significant backlog deterioration points to the budgetary pressures and revenue consequences to come.'