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№ 098 22 filings · 2021-09-14 → 2026-06-02

CHEMRING GROUP PLC

CHG
Industrial Goods and Services Share price 544p Market cap £1.5bn Overall fit 500 /1000

Partial fit: real but partial AI exposure through Roke (~35% of profits), meaningful operating leverage from the energetics capacity ramp, and solid downside protection via order book — but the stock already trades at ~30x trailing EPS, pricing in the 2028 outcome, which fails the valuation-discipline pillar.

Fair value range 500p–650p Mid case · £1.6bn
Absolute upside +4.5% vs current market cap
Conviction 3/5 confidence in fair call
Supports the call
  • Record £1.4bn order book gives 91% FY26 revenue coverage and multi-year visibility
  • Management quantified £30m p.a. operating profit uplift from £200m capacity programme by 2028
  • Clean audit, consistent 'in-line' trading vs. guidance across five years of filings
Limits the call
  • Execution risk on multi-site energetics commissioning (Chicago/Scotland/Norway)
  • Recurring 'non-underlying' impairments (Alloy, Tennessee legacy) cloud statutory earnings quality
Methodology

Blended sum-of-parts / forward P/E anchored to management 2028 guidance

In one line · bull case

Structural NATO defence upcycle plus a management-guided £30m p.a. operating profit uplift by 2028 from the energetics capacity programme, executed by a proven team on a £1.4bn order book.

In one line · biggest risk

The stock already trades at ~30x trailing EPS, so any slippage in the 2028 capacity ramp or continued UK MOD order softness at Roke risks a de-rating.

Drivers
AI beneficiary 45 /100
Roke provides AI/ML, cyber-EW, counter-drone (CORTEXA) and Vigil AI CSAM detection — genuine but ~35% of group profit; C&E core is munitions.
Operating leverage 60 /100
Management-guided 30% incremental EBIT margin on £100m of new capacity revenue by 2028 — real fixed-cost leverage in energetics.
Earnings vs expectations 55 /100
Consistent meets against guidance; H1 26 UOP -8% but FY expectations reiterated; no material beats or profit warnings.
Growth momentum 65 /100
Record order book, ramping capacity, Roke targeting >£250m by 2028; strong medium-term revenue and profit trajectory.
Moat 65 /100
High barriers to entry in high-grade military explosives, sole-source positions on NASA/ULA/Blue Origin initiators and UK F-35 countermeasures.
Earnings quality 60 /100
Recurring 'non-underlying' items (Alloy £8.3m impairment, Tennessee £6.7m, pension buy-in £5m) create material gap between underlying and statutory.
Management quality 65 /100
Ord team executing coherent strategy, prudent capital allocation (buyback + dividend + capex + focused M&A), candid disclosure.
Cyclicality 40 /100
Defence spending structurally rising post-Ukraine; long-cycle order book of £1.4bn insulates from typical industrial cycle.
Leverage 40 /100
Net debt £144.5m / 1.47x EBITDA at H1 26, rising during peak capex phase to FY27; well within 3x covenant but no longer fortress.

Chemring Group PLC (CHG) — Investment Research Note

Executive summary

Chemring is a UK-listed defence and national security specialist with two segments: Countermeasures & Energetics (specialist military explosives, propellants, precision energetic devices, and expendable countermeasures) and Sensors & Information (Roke — a cyber/EW/AI technology consultancy plus a US biological detection franchise). Across the filings, order book has grown from ~£500m (FY21) to a record £1,399m (H1 26), revenue from £393m to a run-rate £500m+, and margins have expanded modestly, driven by structurally higher NATO defence spending, stockpile replenishment post-Ukraine, and Roke's growth. The single most important valuation issue today is that the shares now trade at ~30× trailing underlying EPS on the promise of a ~£30m p.a. operating profit uplift from the current £200m+ energetics capacity programme completing in 2028 — most of that uplift is already in the price.

Fair value estimate

Range: 500p – 650p per share (implied market cap ~£1,353m – £1,759m)
Mid: ~575p / ~£1,556m
Methodology: blended sum-of-parts / forward P/E anchored to management's 2028 guidance discounted back.

Key assumptions:

  • C&E: FY25 underlying operating profit £61.6m, + management-guided £30m p.a. from Chicago/Scotland/Norway capacity by 2028 ≈ £90-95m. Value at 12-14× EBIT.
  • S&I (Roke): FY25 underlying operating profit £31.2m, targeting >£250m revenue by 2028 at high-teens margins ≈ £45-50m operating profit. Value at 16-18× (premium multiple reflecting cyber/AI mix).
  • Unallocated central costs: ~£20m p.a.
  • Group FY28E underlying operating profit ≈ £115-125m; underlying EPS ≈ 28-32p. Applying 18× and discounting 2 years at ~10% ≈ 500-580p. Bull case with multiple re-rating and additional Roke acquisitions supports the top end.
  • Trailing FY25 diluted EPS 19.4p; H1 26 diluted EPS 6.1p (-8%) implies FY26E EPS in the 20-22p range (management guides ~70% H2 weighting).

Vs. current price 620p / mkt cap £1,696m: absolute upside ~-7% at the mid-point. View: fair, slightly overvalued. Investors are already paying for the 2028 outcome.

Sector context

  • Sector: Industrial Goods & Services (Aerospace & Defence sub-sector). Confirmed.
  • Chemring's quality/growth profile is above the typical UK industrials peer, driven by: strong FY25 free cash generation (114% conversion), high-barrier-to-entry niches, growing order book, and the Roke technology business. Balance sheet leverage is moderate (net debt / EBITDA 1.47× at H1 26, rising during the peak capex phase).
  • Listed peers: BAE Systems (BA.), QinetiQ (QQ.), Cohort (CHRT), Babcock International (BAB). BAE and QQ. are the closest reference points on business mix; QinetiQ is arguably the best Roke comparator.

Investment thesis (3 bullets)

  • Structural NATO defence upcycle + a record £1.4bn order book giving multi-year visibility. 91% of FY26 revenue and 81% of FY27 revenue in C&E already in the order book at H1 26; management explicitly frames elevated spending as "structural, not temporary" 2026-06 interim.
  • Roke is a genuine AI/cyber beneficiary with a growing product mix. Launched CORTEXA counter-drone system (early sales to Sweden and UK), acquired Landguard (SDR/tracking) and Vigil AI (Home Office-trained CSAM detector). Roke targets >£250m revenue by 2028 vs. £174.8m in FY25 with high-teens margins 2026-06 interim, 2026-06 H1, 2025-06 interim.
  • Committed £200m+ capacity expansion in energetics is scheduled to add ~£100m revenue and ~£30m operating profit p.a. from 2028 — meaningful operating leverage on a fixed-cost base with sole-source positions in high-grade military explosives 2025-06 interim; 2026-06 interim.

Key risks (3 bullets)

  • UK MOD order timing and macro fiscal pressure. H1 26 S&I margins fell sharply (17.4% → 10.1%) because Roke retained cleared staff ahead of delayed Defence Investment Plan awards. If UK MOD order flow disappoints, S&I operating profit is highly sensitive 2026-06 interim.
  • Capacity ramp execution and rising net debt. Net debt jumped from £89m (FY25) to £144.5m at H1 26 with further increases guided through FY26/FY27; leverage 1.47× EBITDA vs. 0.97× a year ago. Delays or cost overruns at Scotland/Chicago/Norway could impair the 2028 profit uplift on which the current valuation depends 2026-06 interim.
  • Legacy US countermeasures & Alloy Surfaces closure. Alloy was closed in H1 26 with £8.3m impairment; Tennessee legacy retirement took a £6.7m charge; recurring "non-underlying" items suggest the reported statutory earnings are noisier than the underlying number. Kilgore CGU has thin headroom on the impairment test 2026-06 interim.

Operating leverage

Chemring has moderate-to-meaningful operating leverage, but not the extreme fixed-cost leverage of a pure-software platform. C&E is an asset-heavy business with high fixed manufacturing infrastructure — the FY25 C&E margin of 19.1% (vs. 15.6% in FY22) demonstrates that as volumes scale, incremental margins are strong. Management's own guidance quantifies this: the £200m capex programme is expected to generate £100m of incremental revenue and £30m of incremental operating profit p.a. by 2028 — a 30% incremental EBIT margin, well above the current 14.8% group underlying margin 2025-06 interim, 2026-06 interim. In S&I, Roke is more variable-cost (people-heavy) but has proven capable of ~20% margins ex-pass-through when utilisation is high. Group unallocated central costs sit around £20m p.a. and grow only modestly — so above-plan revenue drops meaningfully to profit. A 10-15% upside surprise to revenue in the outer years could plausibly add 25-40% to operating profit given the fixed-cost intensity of the energetics footprint.

Value-trap signals

None identified as classic value-trap markers. Order book is at a record, dividend is growing, cash conversion is strong, and demand is structural. The main concern is the opposite: the stock trades at a growth-stock multiple on a defence-industrial business that could disappoint if capacity ramp slips or UK MOD orders remain soft.

Earnings vs. expectations

Across the filings, Chemring has generally met rather than beaten expectations:

  • FY24 trading update (Oct 2024): "in line with the current range of analyst expectations" 2024-10
  • FY23 trading update (Nov 2023): "in line with Board and analyst expectations" (consensus £67.0m OP; delivered ~£69m underlying) 2023-11
  • H1 25, H1 26: both described as "in line with Board's expectations"; H1 26 UOP was -8%, but full-year expectations were reiterated unchanged
  • FY25 saw a discontinued Alloy Surfaces impairment (£8.3m + earlier £5.1m) and Tennessee legacy retirement charges (£6.7m) — recurring "non-underlying" items suggest execution slips despite headline "in line" messages Overall pattern: reliable meet on underlying, with recurring one-off exceptionals slightly clouding statutory reporting.

Conviction

Conviction: 3 (moderate). Anchors: (i) very high order-book visibility (91% FY26 coverage; 81% FY27 in C&E); (ii) management-quantified 2028 uplift with clear capex schedule; (iii) audited disclosure and clean KPMG interim review. Limits: (i) FY28 outcome depends on complex commissioning of energetics facilities in three geographies; (ii) Roke's growth trajectory to £250m depends on UK MOD/DIP timing which was already a H1 26 headwind; (iii) frequent non-underlying items reduce confidence in translating underlying to statutory EPS cleanly.

Overall driver scoring rationale

Chemring is a decent partial fit: real (but modest) AI exposure via Roke, genuine operating leverage from the capacity programme, and quality management — but the current price effectively already discounts the 2028 outcome, and the AI-receiver angle is a minority of group profits. Not top-band for this strategy.

Filings consulted · 24

Every document the LLM read for this note. Click any row to open the source.

  1. 2026-06-02Interim Results2026-06-02_9595959_interim-results.md0.90
  2. 2026-02-20Result OF Agm2026-02-20_9440958_result-of-agm.md0.30
  3. 2026-01-12Notice OF Agm2026-01-12_9348150_notice-of-agm.md0.26
  4. 2025-06-30Acquisition OF Landguard Systems2025-06-30_8953262_acquisition-of-landguard-systems.md0.49
  5. 2025-06-03Interim Results2025-06-03_8908782_interim-results.md0.58
  6. 2025-02-26Result OF Agm2025-02-26_8754053_result-of-agm.md0.20
  7. 2025-01-27Notice OF Agm2025-01-27_8707989_notice-of-agm.md0.20
  8. 2024-10-17Trading Update2024-10-17_8491083_trading-update.md0.55
  9. 2024-06-04Half Year Report2024-06-04_8239993_half-year-report.md0.41
  10. 2024-02-23Result OF Agm2024-02-23_8054171_result-of-agm.md0.14
  11. 2024-01-15Notice OF Agm2024-01-15_7990225_notice-of-agm.md0.14
  12. 2023-11-10Trading Update2023-11-10_7872660_trading-update.md0.38
  13. 2023-09-12Trading Update And Contract Wins2023-09-12_7749042_trading-update-and-contract-wins.md0.38
  14. 2023-06-06Half Year Results TO 30 April 20232023-06-06_7560612_half-year-results-to-30-april-2023.md0.23
  15. 2023-03-15Result OF Agm2023-03-15_7439770_result-of-agm.md0.07
  16. 2023-03-15Agm Trading Update2023-03-15_7436272_agm-trading-update.md0.21
  17. 2023-01-16Notice OF Agm2023-01-16_7438162_notice-of-agm.md0.07
  18. 2022-12-13Final Results2022-12-13_7407039_final-results.md0.25
  19. 2022-10-06Trading Update2022-10-06_7248536_trading-update.md0.21
  20. 2022-06-08Interim Results2022-06-08_6867275_interim-results.md0.23
  21. 2022-03-03Result OF Agm2022-03-03_7015857_result-of-agm.md0.07
  22. 2022-01-17Notice OF Agm2022-01-17_6857773_notice-of-agm.md0.07
  23. 2021-11-02Trading Update And Contract Awards2021-11-02_6626405_trading-update-and-contract-awards.md0.21
  24. 2021-09-14Scheduled Trading Update2021-09-14_6825364_scheduled-trading-update.md0.21

This research note was authored by a large language model after reading 22 regulatory filings published between 2021-09-14 and 2026-06-02. Each citation refers to a specific RNS announcement in the underlying data set. The note is an opinion, not advice. Do your own work before risking capital.