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FTSE 250 high-tech defence firm Chemring (LSE: CHG) is trading at a 14-year high of £5.54. The last time it traded at more than this was 1 September 2011, when it hit £5.65.
That said, there can still be value left in the shares as price and value are different things.
I took a deep dive into the business and ran the key numbers to get to the bottom of the firm’s valuation.
Increased spending by NATO
Chemring’s shares are trading at such lofty levels partly because of the increasing defence threat to the West. Most immediately this comes from Russia, but long term from China as well.
NATO Secretary General Mark Rutte said in December that “it is time to shift to a wartime mindset”. He added that the alliance’s members are not spending enough to prepare for a future conflict with Moscow. He concluded by urging members to “turbocharge” their defence spending.
US President Donald Trump has suggested that the US will not protect NATO allies that are not spending enough on defence.
The figure now being targeted by Europe’s NATO members is 5% of each country’s gross domestic product. Last year, they spent an average of 2%.
Record order book
Chemring’s share price rise is also up as it looks well placed to benefit from this increased spending.
It is a world leader in the Sensors & Information, and Countermeasures & Energetics sectors. These include cutting-edge products for chemical and biological threat detection, and electronic warfare capabilities. Additionally, it produces systems for the detection of improvised explosive devices.
It supplies 60% of NATO’s naval fleets and 85% of its air fleets. It is also a key precision technology supplier to NASA and SpaceX. And it is on the UK Ministry of Defence’s ‘trusted supplier’ list for a range of cyber defence and other systems.
A risk here is any major failure in one of its key products. This could damage its reputation and its order book.
That said, Chemring’s H1 2025 results looked extremely good to me. Its order book jumped 25% year on year to £1.303bn – the highest in its history. Order intake over the period soared 42% to £488m.
Revenue rose 5% to £234.3m, while underlying earnings before interest, taxes, depreciation, and amortisation increased 12% to £39.8m. Underlying profit was up 8% to £27.1m.
Chemring is well-positioned to increase annual revenue to £1bn by 2030 (from £510m in 2024), according to the firm.
How does the share valuation look?
I ran a discounted cash flow analysis to ascertain the fair value of Chemring’s shares.
Using other analysts’ figures and my own, this shows the stock is 32% undervalued at its £5.54 price.
Therefore, the ‘fair value’ for the stock is £8.15.
Given its strong growth prospects and very undervalued price, I am sorely tempted to buy Chemring shares.
However, I must remain aware of the fact that I already have holdings in BAE Systems and Rolls-Royce. Consequently, adding any more stocks in the defence sector would unbalance my portfolio.
That said, I think it is well worth the consideration of other investors whose portfolios it suits.
