Chemring (LSE:CHG) is a FTSE 250 company experiencing some whirlwind growth right now.
The Romsey-based company, which has a market cap of £1.02bn, specialises in providing advanced technology solutions for defence, security, and safety markets.
The company’s product range includes countermeasures, sensors, and energetic systems designed to protect military personnel and assets.
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Understandably, the company has been performing rather well of late with conflict raging in Europe and the Middle East.
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Business is booming
In the six months to 30 April, Chemring’s order book surged 39% to a record £1.04bn. Revenue increased by 8% to £223.4m, bolstered by 19% growth at its Roke business unit — Roke provides technology, engineering, and advisory services to governments.
However, the group’s countermeasures segment in Tennessee experienced weather-related challenges, delaying the ramping up of its automated facility, offsetting gains in specialist energetic materials.
Nonetheless, there are clearly positive trends pushing the company forward.
CEO Michael Ord noted the ongoing geopolitical tensions that are driving a rearmament upcycle, providing long-term growth visibility and opportunities for strategic partnerships through the decade.
The firm wants to see sales quadruple to nearly £1bn by 2030 and the current environment is making that possible.
Chemring says that NATO nations are reacting to war in Ukraine, Gaza, and an increasingly assertive China by spending more on defence.
Much of the spending related to Ukraine relates to replenishment after NATO nations have donated existing stock to the war effort.
What do analysts think?
It’s not just Chemring’s CEO who is positive about the future – analysts tend to be as well. There are currently five ‘buy’ ratings and one ‘underperform’ rating for the stock. The average share price target is £4.39, inferring that the stock is trading at an 18.8% discount.
A stock to watch
I have no doubt that Chemring is a stock to watch over the coming years. In addition to broad market trends, as mentioned above, it’s in prime position to benefit from AUKUS Pillar 2. AUKUS Pillar 2 concerns the development of advanced technologies, rather than nuclear submarines, which is Pillar 1.
Chemring has facilities in all three of the AUKUS countries — Australia, UK, US — and its operations fit within the scope of projects defined under Pillar 2, notably the working groups on electronic warfare and cyber capabilities.
It’s also not particularly expensive compared with peers BAE Systems. It trades at 19.8 times earnings for 2024, 17.8 times earnings for 2025, and 16 times earnings for 2026. BAE trades at 19 times forward earnings.
However, defence stocks can bounce up and down on geopolitical developments. A Labour government will spend more on defence, they say, and a Trump presidency will force European to spend more on defence. These are positive catalysts.
An end to Russia’s war in Ukraine, a reformist Iran, and a less assertive China. These could impede the long-term outlook for Chemring.
Personally, I’d expect to see the stock slowly push higher over the coming years. But that’s under the current assumed scenario, which includes a Trump government and high tensions.
However, in a bull case scenario, where sales hit £1bn and tensions bubble over, I can definite see this stock doubling in value by 2030.
