FTSE 250 incumbent Chemring Group (LSE: CHG) has been on my radar for sometime. Last week, it released a great update. Here’s why I reckon it could be set for an exciting year ahead, and why I’d buy some shares the next time I can.
Chemring shares on the up
I think it’s vital to have a diversified portfolio. Even before the unfortunate tragic events in Ukraine and the Middle East, defence spending was nearing all-time highs and now it continues to climb. I must admit I’m hoping all conflicts come to a peaceful resolution. However, there are still defence aspects nations want and need.
Chemring may not be as well known as other defence businesses, like BAE Systems, for example. It produces decoy measures against missile threats. Like its counterpart, it has a great footprint and profile.
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As I write, the shares are trading for 335p. At this time last year, they were trading for 299p, which is a 12% increase over a 12-month period.
Recent update, future outlook, and enticing fundamentals
Results for the year ended 31 October 2023 were magnificent. In fact, the results achieved were above and beyond the firm’s initial expectations.
The headline that stuck out for me was the business reported a record order period, worth £756m. This was a 37% increase on the previous year and helped the firm’s order book reach levels last seen a decade ago. In addition to this, revenue and pre-tax profit increased by 18% and 17% respectively. It also hiked its dividend by over 20%.
Plus, the business is looking to allocate its boosted coffers towards expansion and growth plans, which is pleasing to see.
So let’s look at some fundamentals then. Despite the shares rallying since the update, they still look decent value for money on a price-to-earnings ratio of 16. Plus, a dividend yield of just over 2% is higher than the FTSE 250 average of 1.9%. However, it’s worth noting that dividends are never guaranteed.
After such a successful period, can Chemring continue its momentum? Based on defence spending trends and the current geopolitical landscape, I absolutely think so.
Risks and conclusion
One of the biggest threats for Chemring right now is the threat of supply chain disruptions caused by macroeconomic volatility. This could hurt its ability to fulfill orders, which could then dent performance, returns, and investment viability.
Although Chemring doesn’t have a track record of this, I always think that any type of product failure or malfunction in the defence industry would be catastrophic from a sentiment and reputational perspective. This is an ongoing risk for all product-based businesses.
To conclude, I reckon Chemring is a great alternative way to gain exposure to the defence sector away from the bigger names. Recent results show the business is doing well and trends across the industry indicate it could continue to gain traction and provide growth and returns for investors too.
