Chemring Group (LSE:CHG) shares rocketed over 8% higher to a new multi-year high after its interim results.
Half-year numbers from the maker of defence countermeasures, sensors and explosives were in line with expectations, said analysts at Shore Capital, consistent with the usual weighting between the first and second half for the company.
As well as the "excellent" order intake and a record backlog, yesterday’s Strategic Defence Review (SDR) provided "further support to our medium-term outlook".
The SDR, published by the Ministry of Defence the day before, outlined plans to build at least six new munitions and energetics production facilities in the UK – "highlighting the acute demand for explosives", the Shore Cap team said.
"We believe Chemring is well-placed to benefit directly from a potential UK-based Energetics facility, which could become a major growth driver after the current capex programme is completed."
Analysts at Agency Partners agreed, seeing the SDR as including at least five areas that "could add materially to Chemring’s growth".
As well as the new munitions factories, the SDR also included plans for £1.5 billion of investment into an "always on" pipeline for munitions, which the analysts said should guarantee a steady offtake.
The new Cyber & Electromagnetic warfare command (CEMA) also "looks to us a strong opportunity" for Chemring's Roke subsidiary, which already has won a £40 million order for the British Army's Project Zodiac, with the SDR's mention of a "digital targeting web" (estimated at £1 billion in full) for the Army "appears to us to be a significant enhancement of the work that the Roke won".
A recommendation for the UK to strengthen its biological warfare defences would also be expected to see Chemring offer its US Sensors business's specialist sensor systems for detecting biological warfare agentsm, the Agency Partners analysts added.
"Similarly, the initial £1 billion committed to missile defence appears to us to fund the STORM contract," a £251 million order that Roke won in April.
Chemring revealed that its order backlog grew 25% to £1.3 billion, which the Shore Cap team said provided "exceptional visibility" – particularly within Energetics.
Shore said that while today’s results are in line with expectations, "we believe the shares are likely to outperform, supported by the strength of the order book and long-term structural demand underscored by the SDR" and an Energetics opportunity that "remains underappreciated and has further upside potential".