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Chemring – Aftermath of Tragic CCM Explosion By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

 

 

 

 

Given that its business is primarily defence related, it does seem a little odd that I have not written on Chemring for many years. While I have known of the company and of what it does for as long as I can remember, I have in recent years rarely sought access to the management team and Chemring was never on the list of companies that I previously followed as an equity analyst. Other than having met the current CEO in his previous role, I have not met with any member of the current or previous senior management team of Chemring formally. Nevertheless, I have long recognised that Chemring is in its countermeasures, sensors and energetics based business a very important player with the defence scene and particularly internationally.

In the wake of a tragic explosion in August that left one employee dead and another seriously injured at the Salisbury Wiltshire based, Chemring Countermeasures subsidiary (a manufacturer of flares, chaff and decoy explosives components that protect ships and aircraft when they might be under attack together with the explosive charges that fire ejection seats in military aircraft) Chemring has this morning put out a trading update to the London Stock Exchange which I have (in italics) copied for your interest below.

Given that, on the back of a long period of western governments cutting defence expenditure, there is little use beating around the bush saying anything other than that Chemring has struggled in recent years. Over the past few years senior management has, as they say, come and gone and for Michael Ord who only took over as CEO earlier this year, the explosion at Countermeasures could not have come at a worse time.

Clearly, the interruption to business activities at the UK countermeasures factory is considerable and there is little indicative guidance available in regard of how long it will be before regulators and others allow work on the site to recommence. Even so, with major operations in the USA, Scandinavia and Australia as well as the UK, Chemring appears to now be doing sufficiently well for confidence to return.

As the statement below indicates, the improvement is order book is very noticeable and being a supplier to over 50 nations worldwide is ample demonstration of its market leading status in high technology electronics and energetic products.

Clearly the next year will continue to be tough for Chemring but even though the full impact of the tragic explosion cannot be fully assessed yet, I sense that Chemring can now be said to be on the mend.

Trading Update          

Following the incident on the 19th August at our CCM facility in Salisbury our injured colleague remains in hospital recovering from his injuries.  The Group is committed to supporting him and his family throughout his recovery, along with the family of our colleague who tragically lost his life in the incident.

The investigation into the incident, which occurred in an MTV flare mixing building at the Group’s Salisbury site in the UK, is ongoing and the Group is working closely with the regulatory bodies to determine the root cause.

We are also working with the regulatory bodies on the UK CCM site restart plan. The initial steps of this plan will be to complete the shipment of finished goods inventory and initiate a phased restart of non-MTV product lines. The impact on the Group’s underlying operating profit in the current financial year is likely to be around the middle of the range of £10m – £20m indicated in the statement made on 13 August.

The Group is still assessing the impact on the 2019 financial year which will be dependent on the site restart plan, as agreed with the regulatory bodies, and expected production rates. The Group is accelerating the transition to more automated MTV production facilities, which will improve operational effectiveness.

The Group has engaged with its insurers, but at this stage it is too early to assess the amount of any claim or the likely timing of any payments. The Group’s property damage and business interruption insurance policy has a deductible of £2.5m, an overall policy limit of £60m and a twelve-month indemnity period for business interruption claims.

Countermeasures

The period has seen positive customer demand, resulting in £78m of orders received. The majority of orders were from the US Government for a range of requirements including spectral, infrared and special material decoys, which are manufactured at the Group’s US CCM facilities. This provides strong order book coverage for our 2019 financial year.

Sensors

In Sensors, the Group is pleased to announce that it has received a number of significant awards in the period.

In the counter-IED market, Chemring Sensors and Electronic Systems (CSES) has been awarded a $93m, three-year IDIQ to refurbish and refresh the US DOD’s fleet of Husky Mounted Detection Systems (HMDS). The initial award under this IDIQ contract is for $20m for delivery in the first year of the contract. CSES has also been awarded a $14m incrementally funded Research and Development contract for the HMDS.

In the biological detection market, CSES has also been awarded an IDIQ contract for the Enhanced Maritime Biological Detection (EMBD) program. The scope of work under this Delivery Order includes Engineering, Manufacturing, and Development (EMD) with options for Low Rate Initial Production (LRIP). The total contract value, including options, is $24m with delivery order the initial award under this IDIQ contract being $13.6m, with an initial of $5 m the chemical detection market, CSES has been notified that it was not one of the selected bidders to move to the next stage of the third stream of the Next Generation Chemical Detector (NGCD3) now known as the Multi Phase Chemical Agent Detector (MPCAD). An award decision on the first, and largest, stream of the NGCD program, the Aerosol & Vapor Chemical Agent Detector (AVCAD), is expected shortly.

In the UK, Roke was part of the consortium awarded the contract to provide private sector support to the UK MOD’s procurement team in the delivery of the Battlefield Tactical Communication and Information System (BATCIS), the next generation land tactical In communications and information system.

Energetics

As expected, in the commoditised pyrotechnic and ammunition market, demand continues to soften.  The Group continues to focus on its move away from short-term commodity products to longer-term contracting and partnering agreements in higher margin niche product areas, where the demand for specialist devices and high explosives continues to be robust.

Outlook

Recent contract awards in our Countermeasures and Sensors segments demonstrate both continued customer demand and the progress the Group is making on its roadmap to focus on higher margin, niche market positions where the Group is best placed to generate future value. With the exception of the impact of the CCM incident, trading across the Group remains in line with the Board’s expectations.

CHW (London – 4th September 2018)

Howard Wheeldon FRAeS

Wheeldon Strategic Advisory Ltd,

M: +44 7710 779785

Skype: chwheeldon

hwheeldon@wheeldonstrategic.com

@AirSeaRescue

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