Biting the bullet
Chemring (L:CHG) has announced another profit warning, but unlike previously, management appears to be finally setting about rebasing the company for the future. While FY16 expectations look relatively intact, with 75% order book cover for revenues, a standby rights issue should see debt reduce to manageable levels, enabling management to stop looking over its shoulder and focus on the path ahead. Such repositioning should come as a welcome relief to investors.
Missing the target
Chemring announced that the expected substitution of a Middle Eastern 40mm ammunition contract for the termination of a similar US DOD contract is likely to be delayed into FY16. Chemring has an October year end, so while contract process could mitigate some of the worst affects, timing is extremely restricted. Together with other elements, the shortfall in operating profit is £16m, reducing expectations by c 33% to £33m, which also affects the dividend. Highlighting that dividend cover would be maintained at 3x is surprising only in respect that we might have expected a passing of the final dividend given the potential rights issue. Equally as important, the delay to the related £12m advance payment will leave debt covenants exposed, for which management are now seeking temporary relief.
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