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Berenberg initiates coverage on Chemring with 'buy' rating
Analysts at Berenberg initiated coverage on small-cap defence company Chemring on Wednesday, giving it a target price of 211p and issuing it a 'buy' rating.
Berenberg said that Chemring, which had recently entered a phase of earnings growth after several years of reduced order intake that had resulted in multiple profit warnings, was beginning to reap the benefits of a "generally more favourable" market backdrop and enhanced earnings visibility and stability via long-term programmes like those the firm had with the US Department of Defence.
As NATO continued to increase operations in Afghanistan, Iraq and Syria and with those of its Middle Eastern customers showing no sign of slowing down, Berenberg believed that Chemring's portfolio was well positioned to deliver "stable top-line growth".
The analysts said that two large high-margin programmes with the US DOD would improve the company's product mix, noting that the company would become increasingly more cash generative.
Berenberg forecast free cash flow (FCF) growing at a rate of 13% between 2018 and 2021, with a FCF yield of 1.7% in 2017 rising to 6.4% in 2021.
Discussing the valuation, the analysts said, "The shares trade on a 13.5x 12-month forward EPS, having derated from their two-year peak of 17.4x in March 2017. Now at an 11-20% discount to peers, we think valuation metrics are attractive, given a strong set of interim results and a subsequent trading update."
As of 1640 GMT, shares had gained 2.04% to 179.80p.