Broker snap: UBS downgrades Chemring to 'neutral'

19th Jul 2013 11:02

UBS has downgraded its recommendation for defence technology firm Chemring from 'buy' to 'neutral' on the back of cuts to short-term profit forecasts.The broker has reduced its target price from 360p to 330p after lowering earnings before interest, tax and amortisation (EBITDA) estimates for the years ending October 2014 and 2015 by 11% and 13%, respectively. "Our new forecasts reflect a lower base of underlying EBITA in FY13 than we had previously forecast and the restructuring plan presented at H1," UBS said.Chemring had announced last month immediate priorities for its 'Performance Recovery Programme', including strengthening and simplifying the organisation structure of the business, integrating business units and exploiting untapped synergies.While it has made near-term downgrades, UBS reckons that the restructuring plan by the new management team is likely to "drive an improvement in Chemring's profitability and cash flow, despite the headwinds from tough defence markets"."We estimate there is further upside of c£5-10m to EBIT, above the targeted £10m cost savings, from an improvement in execution across the businesses and have reflected this in our forecasts."However, there are still some concerns about the short-term outlook for US defence budgets given that sequestration has not been fully implemented, the broker said."This presents a challenge to management efforts to restructure Chemring in the short term because of the short cycle nature of many of Chemring's businesses. "After reducing FY13 guidance at H1, we believe that stabilising earnings and tangible signs of restructuring are likely to make us consider becoming more constructive on the stock."The shares were down 4.53% at 306.57p by 11:00 on Friday.BC