CHG12 Jan 2014 21:29
For now, all we are told is that "a number" of Chemring’s business units "do not form part of its longer-term strategy," and that management has kick-started the process to sell them. Few analysts are prepared to speculate which ones, but Citi admits it would cheer the sale of the lower-margin munitions operation, and Investec Securities reckons external buyers would value businesses dumped in Chemring’s Energetic Sub-Systems division.
Management will likely use full-year results on 23 January to flesh out the detail, but as JP Morgan rightly points out, current uncertainty provides "the opportunity for a surprise on the proceeds." Remember, too, that US private equity giant Carlyle considered buying Chemring in 2012, and despite walking away after three months of talks, it definitely saw something of interest. Back then, analysts told us they thought someone like Germany’s Rheinmetall, or former Honeywell unit ATK would eventually buy Chemring. They still might.
Clearly, Chemring will want to hang on to the sensors division, where margins are far higher than the other three units and opportunities to break into new markets are greater. Its countermeasures operation will remain core, too. Here, volumes have likely bottomed out and should recover when both the F-35 and Typhoon jets go fully operational.
Of course, defence spending among NATO customers remains tight, and non-NATO clients have deferred orders. Indeed, having slumped by a quarter in the final three months of the financial year to £185m, revenue fell 16 per cent to about £625m last year. An order book worth £702m is down 8 per cent, too. This year, however, might be better than feared following an agreement struck in Congress last month. Cuts to military spending in the US, where Chemring generates just under half its sales, will be reduced by $31.5bn (£19.2bn) over the next two years - valuable time to diversify into civilian markets..............
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