Chemring (LSE:CHG) is FTSE 250 Index the company is currently experiencing a period of lively growth.
The Romsey-based company, which has a market capitalisation of £1.02bn, specialises in providing advanced technology solutions to the defence, safety and security markets.
The company’s offering includes countermeasures, sensors and energy systems to protect military personnel and property.
Understandably, the company has been doing quite well recently, given the conflict in Europe and the Middle East.
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Business is booming
Chemring’s order book rose 39% to a record £1.04bn in the six months to April 30. Revenue rose 8% to £223.4m, boosted by 19% growth in its Roke business unit, which provides technology, engineering and consulting services to governments.
But the group’s remediation business in Tennessee has been plagued by weather-related challenges, which has delayed the start-up of an automated plant and hurt gains in its specialty energy materials business.
Despite all this, there are clearly positive trends that are driving the company’s growth.
CEO Michael Ord highlighted ongoing geopolitical tensions that are driving the rearmament cycle, providing long-term growth visibility and opportunities for strategic partnerships over the course of the decade.
The company wants sales to quadruple to almost £1bn by 2030, and the current situation allows for this.
Chemring says NATO countries are responding to the war in Ukraine, Gaza and China’s increasingly assertive actions by increasing defense spending.
Much of the spending related to Ukraine is to replenish supplies after NATO countries contributed them to the war effort.
What do analysts think?
It’s not just the Chemring CEO who is bullish on the future – analysts are too. The stock currently has five ‘buy’ ratings and one ‘underperform’ rating. The average target price for the stock is £4.39, meaning the stock is trading at an 18.8% discount.
Actions worth attention
I have no doubt that Chemring is a stock to watch in the coming years. In addition to the general market trends, as mentioned above, it is in a great position to benefit from AUKUS Pillar 2. AUKUS Pillar 2 is about developing advanced technologies, not nuclear submarines, which is Pillar 1.
Chemring has facilities in all three AUKUS countries – Australia, the United Kingdom and the United States – and its activities are aligned with the projects identified under Pillar 2, in particular the Electronic Warfare and Cyber Capabilities Working Groups.
It is also not particularly high-priced compared to similar products. BAE SystemsThe company’s shares are valued at 19.8 times 2024 earnings, 17.8 times 2025 earnings and 16 times 2026 earnings. BAE is valued at 19 times forward earnings.
But defense stocks can jump up and down with geopolitical developments. A Labor government will spend more on defense, they say, and a Trump presidency will force Europeans to spend more on defense. Those are positive catalysts.
The end of Russia’s war in Ukraine, a reformist Iran and a less assertive China. This could complicate Chemring’s long-term prospects.
Personally, I would expect stocks to slowly rise in the coming years. But that is within the current assumed scenario, which includes a Trump administration and high tensions.
However, in an upside scenario where sales reach £1bn and tensions peak, I confidently predict the stock will double in value by 2030.
