Chemring tumbles on Barclays downgrade

Chemring tumbled on Friday as Barclays cut its stance on the stock to 'underweight' from 'equalweight' and chopped the target price to 185p from 258p as it said company-gathered consensus is "materially" outdated after the Salisbury fatality in August and the premium valuation is unjustified.

Barclays said it sees "strong" de-rating potential around the pre-close trading update, due on 15 November, as the full financial impact on earnings and cash from the Salisbury incident is recognised on a multi-year basis.

Chemring said last month that a blast at its Countermeasures facility near Salisbury that resulted in one fatality and one critically injured employee, would dent full-year underlying operating profit by £15m. This was in the middle of the range it had given in August.

Barclays also pointed to a material revenue deceleration relative to UK defence peers.

"Even factoring in the partial offset generated by the H118 uptick in order intake for Countermeasures USA, we now forecast organic revenue decline of 11%/4% in FY18/19, versus the broadly flat UK defence average of circa 1%," it said.

The bank also noted that Chemring's share price has risen 16% year-to-date, having largely recovered from the Salisbury announcement in August.

"In our view, the market appears to be treating the event as one-off in nature and ‘in year’. This is despite consensus FY18E/19E earnings per share having fallen 26%/10% in the past three months. We think the stock looks overbought on both a relative and an absolute basis."

At 0915 BST, the shares were down 7.4% to 193p.