Jim Armitage: Chemring tragedy will have a serious long-term impact

Just when we thought Chemring was getting over its reputation for spontaneously combusting on a regular basis, the explosives manufacturer suffers a tragic, fatal accident at its most profitable plant.

The blast happened at its Chemring Countermeasures division in Wiltshire, which makes flares, chaff and other decoy kit to protect ships and aircraft under attack.

Awful though the accident was, it is only one factory in Chemring’s global operations, so how, therefore, could it smash this year’s profits from an expected £55 million to £35 million? Given its recent travails, and the fact that a new chief executive started just a few months ago, cynics could be forgiven for thinking the company was taking the opportunity to “kitchen sink” the business and set new broom CEO Michael Ord some lower expectations.

On this occasion, the cynicism seems not to be fair. The tragedy will have a disproportionately large impact on the profit because countermeasures is the most lucrative part of Chemring, and the blast came at the worst possible time of year. Chemring tests its new products out on Salisbury plain in the fair weather months of May, June and July. It then makes and ships the goods to clients between now and October. With its factory suspended at this critical time, that revenue-earning work cannot be done.

Furthermore, we have no clear idea when work will be able to resume.

Some of the interruption to the business will be covered by insurance, but Chemring is unable to give much guidance so far.

Normally, when a tragedy hits a company and its shares crash by over 10%, it is worth the risk of buying them in the hope the market has overreacted.

On this occasion, with profits set to fall short of expectations by more than a third, it looks like shareholders have got off lightly. Avoid.