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British defence specialist Chemring is predicting a decade of rearmament with continuing geopolitical tensions leading to customers locking in suppliers to meet heightened demand.
The FTSE 250 company, which supplies explosives and propellants to a range of larger defence companies as well as to Nato allies, said it was in talks with several customers focused on signing supply agreements that were “beyond the usual contracting terms”.
The company was in talks with a large US company about providing material through to 2031 and potentially for a further decade beyond that, said Chemring chief executive Michael Ord.
He added that there was a “recognition of a strategic undersizing of the supply chain” among both governments and prime contractors. Large defence contractors were “seeking to secure their position in supply chains for an extended period of time” as part of a “fundamental rearmament upcycle”.
The war in Ukraine and tensions in the Middle East and Asia have prompted governments to raise military spending, boosting industry order books. Military spending around the world rose almost 7 per cent to a record $2.4tn last year, the steepest annual increase in 15 years, according to the Stockholm International Peace Research Institute.
In the UK, the government recently announced that defence spending would rise to 2.5 per cent of gross domestic product by 2030.
The unprecedented demand, however, has strained the industry’s supply chain, which has suffered from decades of under-investment since the end of the cold war.
Ord said that while helping to arm Ukraine was one driver for the heightened demand, another was the recognition of the need to “establish onshore, sovereign capabilities” and a defence industrial base that “has the capacity to be able to support a high intensity conflict”.
The new environment helped to propel Chemring’s order book to a record £1bn in the first six months of the year, with the company setting out an ambitious target to generate about £1bn in annual revenues by 2030.
It is expanding the capacity of its explosives business in response to the heightened demand.
Chemring, which also makes a range of sensors as well as countermeasures to protect air and sea platforms against missiles, said its order book rose 39 per cent to £1.04bn in the six months to the end of April, the highest level in its history. Revenues were up 8 per cent to £223.4mn in the period.
Despite the stellar order intake, Chemring’s pre-tax profit dropped 31 per cent in the first half of the year owing to pension costs, higher finance costs and operational problems at its plant in Tennessee, which makes infrared devices to counter enemy attacks.
Shares in the company have surged more than 45 per cent over the past 12 months as investors have bought into the prospect of more orders. They were trading at 390p on Tuesday morning, down 1 per cent.
Chemring said it would increase its interim dividend by 13 per cent to 2.6p a share.
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