It is encouraging that at least one of our battered defence contractors is back on recovery course, after more bad news already this year from Cobham. Chemring, which makes defence countermeasures such as sensors to detect improvised explosive devices and biological agents and chaff to protect aircraft, had a rotten first half of its financial year.
The main problem was with a two-year contract, worth £100 million or more, to provide rifle-launched grenades to an unnamed Middle East nation, generally reckoned to be Saudi Arabia. There was the occasional production problem too.
Chemring was forced to raise almost £81 million at the start of last year by means of a rights issue to pay down debt, while delays on that ammunition contract pushed deliveries into the second half. The final and interim dividends were axed.
Full-year figures to October were bound to be better, even after the usual second-half weighting. The numbers suggest Chemring is back where it wants to be even before the closure and consolidation of some production facilities as part of an efficiency drive designed to raise margins from 11 per cent towards the mid-teens.
The company also got a strong lift from the weaker pound — revenues for the year were ahead by 26.5 per cent at the reported level, or 16.7 per cent at constant currency rates. The market had been primed to expect pre-tax profits of about £32 million. These came in at £34 million, up 47 per cent in constant currencies, which makes one suspect that earlier estimate was deliberately cautious.
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That ammunition contract is now fully running, and while it expires in spring 2018 the prospects of finding replacement work look good. The US defence industry remains an uncertainty; the sort of sensors Chemring supplies are unlikely to be affected but the company is heavily involved in the F-35 programme and in the process of gaining a permit to manufacture for this in Australia.
There is also a return to the dividend list, but it will not make Chemring an income stock, a final payment of 1.3p costing only £3.5 million. The shares have recovered sharply since this column recommended them, aided by the lower pound. Up another 4¼p to 172p, they sell on 15 times earnings.
My advice Hold
Why The shares have rebounded well and some might take profits, but the board still seem to be under-promising on further recovery
British Land
Have they or haven’t they? Reports continue to circulate that British Land has sold its half of the Cheesegrater tower in the City to a Chinese billionaire after a discreet auction before Christmas. The company’s third-quarter trading statement made no mention of it, which would have been required if it was a done deal, but a sale would be a strong vote of confidence in the top end of the London market.
As it is, the quarter saw progress on all counts for the business, which has about half its portfolio in retail. The occupancy rate may have eased, but retail lettings continue to complete at a healthy premium to estimated rental value, with offices at pretty much in line.
Speculative developments, not a business one wants to be in when there is uncertainty over the direction of the market, are only 5 per cent of the portfolio. British Land is in talks with potential occupiers of 1.4 million sq ft of property across four of its developments, including Canada Water where work has yet to start. The shares, off 22½p at 595½p, yield 4.8 per cent, but this does not seem the time to increase exposure to top-end London property.
My advice Avoid
Why Too many uncertainties over top end of market
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Workspace Group
If any part of the London property market were to see the first signs of a slowdown, one might think it would be Workspace Group and other providers of office space. Seemingly not; by all the metrics, the first nine months and the third quarter were moving ahead as well as at any time.
In particular, a 9.3 per cent rise in the like-for-like rent roll over the nine months would seem to point to another comfortable double-digit increase this financial year. Workspace says it is still attracting tenants, with Mozilla, the American computer browser group, agreeing to move out of Covent Garden into its Metal Box site on the South Bank.
Like much of the property sector, the company suffered a complete freezing of the market in the fortnight or so after the referendum. Its share price collapsed from about 840p to below 600p, though it has recovered and stood at 760p, 14p lower, at last night’s close. Inquiry levels and new lettings in the generally quiet third quarter are actually ahead of their levels a year before.
Workspace has not bought a new site to develop since the start of last year, though it has bid unsuccessfully for about five since the referendum. The company, which has 65 sites in London, claims that this is not a constraint, and it has a loan to value ratio of 14 per cent, exceptionally low for the sector. Instead it has been pumping out dividends, 40 per cent up at the halfway stage. A 2.7 per cent dividend yield is little to get excited about, and the share price recovery looks to have run its course.
My advice Avoid
Why Market looks robust but shares have recovered well
And finally...
Talks between Aveva and Schneider Electric of France may have broken down for the second time last summer but this has not prevented the design software producer appearing on at least one list of potential takeover targets. Aveva has been emphasising its strengths as a standalone company at a capital markets day this week, though it has not done the price a lot of good. There are chances to sell to new customers, the company says, while there are also signs of stabilisation and even improvement in some end markets.