Chemring shares under pressure despite robust growth forecasts

The shares of the British defense specialist Chemring experienced a significant decline as issues at a U.S. factory squeezed margins, overshadowing the record order backlog and positive growth forecasts for the coming years. Michael Ord, CEO of the FTSE 250-listed company, which supplies materials and components for missile systems and explosives, remained optimistic about the global defense industry. He projected "strong growth" over the next decade in the context of the Ukraine war and increasing geopolitical tensions in the Asia-Pacific region. Chemring reported record order levels of £1.04 billion, as well as rising revenues and underlying profits, in the results for the fiscal year that ended in October. However, the operating margin decreased to 13.9 percent, from 14.6 percent in the previous year. The cause was operational challenges at a factory in Tennessee, which manufactures infrared devices for defense against enemy attacks. Production disruptions, caused by unfavorable weather conditions and delays in ramping up the automated facility, affected the margin. Additionally, a "legacy" contract with the U.S. government for countermeasures delivery dating from 2016 was extended until 2025. As a result of these challenges, shares fell 10 percent to 310 pence in morning trading, the lowest level in a year. However, Investec analysts continue to rate the company's long-term prospects as "strong." In the context of responses to Russia's war against Ukraine, European NATO members are discussing increasing the defense spending target to 3 percent of GDP. Rising military expenditures are straining the industry's supply chain, which has suffered from underinvestment since the end of the Cold War. Ord emphasized how "crucial" it was that Chemring fulfilled "all our commitments and promises to our customers" in the financial year.