We think Bodycote (BOY) is a self-help story well worth considering. Having stayed on the sidelines with a 'hold' recommendation at the half-year stage, we now feel the transformation of the group's business mix in favour of its more profitable technologies has put the group on a firmer footing. A more flexible and pro-active stance by management should also help shore up margins. Meanwhile, the engineering group's strong balance sheet means shareholders should stand to benefit from either acquisitions, more special dividends or both. And from a valuation perspective, the shares look cheap against peers, having lagged the sector in 2016.
- Low valuation relative to peers
- Reacting faster to demand trends
- Potential for acquisitions and special dividends
- Higher added-value business mix
- Pressure on energy sector budgets
- Sensitivity to economic cycle
Bodycote's specialist coatings are utilised across a broad range of industries, including the aerospace and defence (24 per cent of sales), energy (12 per cent), automotive (27 per cent) and general industrial (37 per cent). So there's an unavoidable correlation to general industrial demand driven by the global economic cycle. What's more, order visibility is limited and many costs are relatively fixed in nature. This makes margins vulnerable to turns in end markets. A recent case in point has been the collapse in demand from the oil and gas sector, which accounts for about 5 per cent of overall sales. In the first half, on the back of spending cuts linked to the fall in the oil price, sales plummeted by almost a half.