The Investment Column: Military pyrotechnics supplier Chemring shows plenty of fizz

NCC; GW Pharmaceuticals
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Our view: Buy

Share price: 1911p (+6p)

In boardrooms on both sides of the Atlantic spending budgets are being cut to ribbons, but someone forgot to tell government defence departments that there is a global financial crisis.

For evidence look no further than Chemring, whose results yesterday lit up an otherwise bleak corporate landscape. Sales, profits, dividends, orders, they are all growing at a double-digit rate, suggesting that the company occupies a parallel universe to the rest of the stock market.

Chemring supplies the Ministry of Defence and the Pentagon with flares and other decoys used to deflect missiles from aircraft, boats and military installations. They are needed in Afghanistan and Iraq as well as trouble spots policed by Nato.

Full-year profits rose 64 per cent to £53m, enabling a 56 per cent rise in the dividend. The energetics division – selling battlefield aids, rocket motors and devices to detonate bombs – has overtaken counter-measures, producing flares, in terms of sales as the largest part of the group.

The benefit for Chemring is that energetics is probably less vulnerable to cuts in military spending. There are concerns that a change of power in the White House could see America's defence budget slashed. But while there might be reduced demand from land forces for devices such as those used to detonate roadside bombs, the air force and navy remain big customers for some of its other hardware, such as detonators to trigger aircraft ejector seats.

There is also growing demand from nations such as South Korea, Turkey and India. Chemring supplies chaff and flares to protect India's Mirage jets.

Despite Chemring's strong performance last year it still has no more than 2.5 per cent of the global pyrotechnics market worth £3bn a year. Likewise it has only a 0.5 per cent share of the £10bn munitions market. While it can expect strong organic growth, it has earmarked £100m for acquisitions this year. Spending is likely to be skewed towards growing energetics.

Up 20 per cent over the past 12 months, there could still be some fireworks in the price. Its own broker believes there is scope for a 20 per cent rise. Buy.


Our view: Hold

Share price: 317p (-13p)

As more laptops disappear from Ministry of Defence cars there is growing concern over what can happen if confidential data stolen from either public or private bodies gets into the wrong hands.

The computer security group NCC sends hit squads into firms to ensure that systems are safe from hackers, and that staff are security conscious. It also tests systems – for instance, making sure a retailer's online operation can cope with a major sale.

But much of NCC's work goes unseen. It has built up a sizeable business providing "escrow solutions". This is where it earns a fee for holding a client's secret source code enabling systems to function and which it will only release in the event of a crisis such as the software supplier going bust.

Both sides of NCC's business have grown strongly, contributing to a 42 per cent increase to £16.4m in revenue at the half-year. Profits are up by a similar amount at £4.6m, and there is a 50 per cent hike in the dividend.

Concern that clients will rein back IT security spending because of budget pressures have not materialised. With fraud in the UKestimated to be costing £20bn a year, they cannot afford to.

The second half should benefit from the acquisition of a rival Dutch "escrow" supplier. The shares have taken a tumble since touching 431p and trade on 15 times expected earnings. There are good growth prospects backed by reliable repeat revenue flows. Hold.

GW Pharmaceuticals

Our view: Hold

Share price: 74p (+6.5p)

This is not the time to be offering advice on speculative biotech companies, but GW Pharmaceuticals does seem to be on the cusp of a breakthrough.

GW has developed a cannabis-based painkiller called Sativex, which is available in Canada for cancer sufferers, but the real hope is that it will win approval from US and European drug regulators.

GW has struck a deal with the Japanese giant Otsuka, which is basically underwriting costs of clinical trials, which are now entering a crucial stage in the US. At the same time GW is making a renewed attempt to win approval from European watchdogs. Results of the US trials and a decision on a European launch should come through within a year.

GW is also pressing ahead with development of other drugs in its pipeline, including a diabetic treatment, THCV.

The shares have been volatile depending on the mood of the newsflow, which has not always been positive.

Unlike other biotechs it has £21m cash, thanks to the deal with Otsuka, while last year's losses were £2.4m lower at £10.9m.

Investors who have stuck with GW should not sell now. Hold.