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Bodycote hots up

Bodycote makes further progress on its margin expansion programme and delivers another special dividend
February 26, 2015

"Things are turning out exactly the way we said they would," says Bodycote (BOY) chief executive Stephen Harris. Since he embarked on a "tidying up" operation in 2009, margins at the supplier of heat treatment, metal joining, hot isostatic pressing and coating services have steadily risen.

IC TIP: Hold at 765p

Most recently, management has been increasing efficiency in Bodycote's European automotive and general industrial unit by closing down underperforming plants. Such measures drove divisional margins up 90 basis points to 15.6 per cent. Moreover, Bodycote's margin model, whereby each customer is analysed and prices set accordingly, boosted the group's core heat-treatment business and helped widen group margins by 90 basis points to 18.2 per cent.

Bodycote also continues to expand in high-margin specialist technologies, which now contribute almost a quarter of group revenue - up from 14 per cent in 2007 - and, tellingly, account for 38 per cent of operating profit. The group is the sole supplier of popular services such as HIP product fabrication, which management describes as "the mother of all pressure cookers", giving it strong pricing power.

Demand is so hot for these services, says Mr Harris, that they haven't been affected by plummeting oil prices. The oil and gas sector represents about a tenth of Bodycote's business, but a third of that is served by specialist technologies.

Broker Credit Suisse expects adjusted pre-tax profit of £114m for the year ahead, giving EPS of 44.6p (from 43.8p in 2014).

BODYCOTE (BOY)
ORD PRICE:765pMARKET VALUE:£1.5bn
TOUCH:763-765p12-MONTH HIGH:821pLOW: 543p
DIVIDEND YIELD:1.9%PE RATIO:18
NET ASSET VALUE:298p*NET CASH:£35.7m

Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201050045.218.08.7
201157175.830.010.9
201258890.035.912.3
2013†62098.438.513.5
2014†609103.741.714.4
% change-2+5+8+7

Ex-div: 26 Mar

Payment: 1 May

*Includes intangible assets of £172m, or 90p a share

†Excludes special dividend of 10p in 2013 and 20p in 2014