Chemring shares shot down by delays on ammunition order

Shares plunged from 226.5p to 142.5p, slashing the value of the company from £437m to £274m

Shares in the weapons maker Chemring fell to their lowest level in a decade after delays on a big export order bounced it into a £90m rights issue.

An ammunition contract with a Middle East customer had not been signed off by US authorities in time for inclusion in the company’s full-year accounts ending this week, it said, forcing a £16m writedown in full-year profits.

Chief executive Michael Flowers said: “The delay to the contract is hugely disappointing, but this is a function of timing... It’s a hugely frustrating situation to find ourselves in. The consequences of the delay are that our earnings will be lower and debt will be higher at the year-end.”

The shares plunged from 226.5p at Monday’s close to 142.5p, slashing the value of the company from £437m to £274m. The stock recovered in later trading to settle at 175p, down 23 per cent. Chemring has £160m worth of net debts, made up mainly of dollar-denominated loan notes, plus a revolving credit facility.

The delay in booking revenue from the Middle East contract means Chemring could default on its huge debt pile, forcing it to pursue a rights issue of up to £90m planned for early next year.

It said it had appointed investment bankers from Rothschild to help in negotiations with lenders to amend promises made to service the debt.

The rights issue, fully underwritten by Investec and JP Morgan, will slash the company’s debt-to-earnings ratio and put it on a surer footing for the future, it said.

The ratio before interest, tax, depreciation and amortisation will fall to between one times and one and a half times, from around three times.

Full-year underlying profits taking into the account the order delay will be £33m, down from the company’s forecast of £49m made last month.

The Middle East order is set to be booked for the next financial year, meaning orders due to be delivered in 2016 now stand at £344.6m – more than 75 per cent of the expected revenues next year of £450m.

Panmure Gordon analyst Sanjay Jha said it was a “horrible profit warning” as he slapped a sell rating on the stock, moving it from the stockbroker’s buy list.

“The main issue for us is the balance sheet,” he said.

In other respects, the company – which makes flares, ammunition and sophisticated equipment to detect mines and explosive devices – was more upbeat.

Proposed cuts to the US defence budget amounting to around $450bn (£290bn) over the next decade have left many weapons makers cautious on future prospects, but Chemring said: “The situation for the US is more positive than it has been for some time, and ongoing geopolitical tensions in the Middle East and elsewhere emphasise the need for robust defence and security measures.”