US And UK Political Shifts Will Threaten Defense Contracts

Key Takeaways

• Heavy dependence on government defense spending and limited diversification exposes Chemring to political, regulatory, and technological risks that could hinder growth and profitability.
  
• Heightened ESG scrutiny and evolving contract structures may pressure margins, increasing compliance costs while masking underlying challenges in recurring profit generation.
  
• Long-term contracts, capacity expansion, defense spending growth, strategic innovation, and secure supply roles position Chemring for resilient, higher-quality, and recurring revenues.

Catalysts

Provides countermeasures, sensors, information, and energetic products in the United States, the United Kingdom, Europe, the Asia pacific, and internationally.

• Chemring's heavy reliance on government spending in the UK and US makes its record order book and optimistic growth targets highly vulnerable to a shift in long-term political priorities, especially given increasing pressure in major Western economies to reduce defense budgets, which could result in slower revenue growth or sudden contract losses post-2027 as current funding cycles roll over.
  
• The company's push for long-term growth is overly reliant on producing double-based energetic materials and countermeasure products, yet emerging international regulatory efforts-including arms reduction initiatives and tougher export controls-could drastically restrict Chemring's market access and limit new sales, impacting top-line revenue and growth trajectory from late this decade.
  
• While Chemring is investing in expanding high-margin product lines and automation, its slow diversification away from traditional energetics and munitions leaves it exposed to technological obsolescence as rapid advances in cyber and unmanned warfare reduce demand for its core offerings, compressing both operating margins and profitability over time.
  
• Chemring's growing reputation as a critical provider of conventional defense technologies faces mounting ESG-related risks, with heightened scrutiny on environmental impact and ethical concerns around defense supply chains likely to lead to increased compliance costs, regulatory burdens, and a negative drag on net margins as sustainable procurement pressure intensifies across the defense sector globally.
  
• The increasing shift toward multi-year framework and prime contracts, especially in segments like Roke, is likely to inflate pass-through revenues without improving underlying profitability, as subcontractor-heavy projects dilute Chemring's consolidated operating margins and inflate reported earnings in the near term while masking growing structural weaknesses in recurring profit generation.

Chemring Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Chemring Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Chemring Group's revenue will grow by 8.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.8% today to 11.4% in 3 years time.
• The bearish analysts expect earnings to reach £76.5 million (and earnings per share of £0.28) by about August 2028, up from £51.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.2x on those 2028 earnings, down from 28.5x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 28.2x.
• Analysts expect the number of shares outstanding to decline by 0.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.61%, as per the Simply Wall St company report.

Chemring Group Future Earnings Per Share Growth

Risks

• Chemring's record-breaking order book of £1.3 billion, underpinned by multi-year government and defense contracts, provides high revenue visibility that could sustain or increase future earnings despite cyclical uncertainties.
  
• Major long-term capital investments and expansion in Energetics, supported by significant customer prepayments and capacity shortages across Europe, position Chemring to capture incremental annual revenue of £100 million and operating profit of £30 million by 2028, which could boost both revenue and net margins.
  
• Sustained global increases in defense spending, especially the U.K.'s commitment to lift defense budgets to 2.5% of GDP by 2027 and 3% thereafter, coupled with a robust pipeline of U.S. and European contracts, create a supportive macro environment for Chemring's top-line growth.
  
• Roke's evolution into a prime contractor on major electronic warfare and missile defense programs, such as STORM, and the launch of next-generation innovative products with international demand could lead to higher-value, recurring revenues and improved earnings quality.
  
• Secular trends in munitions re-shoring, persistent shortages of energetic materials, and Chemring's long-term supply agreements-some extending to 2041-reduce competitive threats and lock in Chemring's role within NATO's and allies' defense supply chains, strengthening future revenue streams and overall financial resilience.

Valuation

• The assumed bearish price target for Chemring Group is £4.9, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Chemring Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £6.7, and the most bearish reporting a price target of just £4.9.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £671.1 million, earnings will come to £76.5 million, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of £5.37, the bearish analyst price target of £4.9 is 9.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.