Investment Column: Results highlight Chemring's strengths

Safestore; Go-Ahead
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The Independent Online

Our view: Buy

Share price: 604p (-33p)

Until now we haven't been the biggest fans of Chemring, the military equipment maker that issued half-yearly results yesterday.

The worries, which we aired in detail in a note last year, were down to the defence squeeze and its likely impact on the sector.

Adding to our caution was the fact the group's shares were trading at a premium to the wider sector in advance of the defence review.

Fast forward to yesterday and Chemring not only posted higher revenues – up by nearly 30 per cent – but also higher profits in the six months to the end of April.

And despite the budget cuts and spending pressure here and on the other side of the Atlantic, it managed to grow its order book, which rose to a record high of nearly £1bn.

That is most encouraging for us for the fact that sales from non-Nato markets make up some 25 per cent of revenues. That represents a marked improvement from the 16 per cent seen last year. The company is delivering on comments made in 2010 to generate more sales from beyond the traditional markets in the West.

In fact the results were so good that some City scribblers threw caution to the wind and said they expected the update to stand out as the best in the defence sector. That may well be so. But is the stock worth buying?

The high valuation multiple that made us so cautious last time has eased, with Chemring now trading in line with the sector at a multiple of under 10 times forward earnings for next year. Given the growth and the strengths evidenced by yesterday's results, we think that it is time to buy, not least because the negative newsflow around the sector is likely to have been priced in by the market already.

A further point is the dividend, with Chemring yielding a dependable 2 per cent, according to Investec.


Our view: Buy

Share price: 133p (-8p)

Safestore took a knock yesterday after making downbeat noises about the economy and revealing that headline interim pre-tax profits had slumped by 85 per cent to £973,000 from £6.6m.

The latter was largely down to a cautious valuation of the company's existing property portfolio.

At the operating level, things look rather better. Despite the tough economic climate, occupancy was up 3 per cent and customers are paying more to stash their things with the storage group. Average rates were up 3.2 per cent.

People become worried about self-storage companies when they look at the torpor in the housing market (mortgage approvals are still bouncing around close to historic lows).

But only about a third of Safestore's revenues are linked to housing and it should be noted that the rental market is buoyant. Remember that tenants tend to move more often than owner-occupiers.

Safestore does suffer from a lack of visibility when it comes to looking forward as some 50 per cent of its revenues come from business customers and when their confidence suffers, so does Safestore.

But there is potential for growth at the company's fast-expanding Parisian arm. And even before yesterday's fall, shares traded at just 69 per cent of the forecast full-year net asset value per share of 204p. They also offer a prospective yield of 3.7 per cent. We are happy to stick with our buy view.


Our view: Buy

Share price: 1,516p (+4p)

Go-Ahead's chief executive Keith Ludeman looks set to go out on a high note when he hands over to David Brown early next month.

The transport group's trading statement, published yesterday, may include few specifics ahead of full-year results to be published on 1 September. But the mood is bullish as the company forecasts that it will beat profit expectations.

The best news for Go-Ahead is in the rail sector, where its three franchises – London Midland, Southern and South-Eastern – show thoroughly respectable growth in passenger revenues and volumes.

The group's bus arm is less of a stellar performer, although the dent in revenues in its regulated London operations is offset by a strong outlook for the coming year and by growth in its smaller businesses outside the capital.

Go-Ahead has bags of potential, with a forward earnings ratio of 11.6 times, falling to 10.9 times on the estimates for next year, according to Deutsche Bank. And remember, rising oil prices, while negative from one angle, present an opportunity for transport firms as drivers think twice about their expensive-to-run cars.