Bodycote launches £60mn buyback

Bodycote (BOY) managed revenue growth of 6 per cent before energy surcharges despite “a mixed end market picture”, particularly in the second half of the year.

Its higher-margin specialist technologies business outperformed, achieving sales growth of 12 per cent. This is the sixth year in a row that it has outgrown the heat treatment side of the business and it now comprises around a third of the group’s revenue. Its greater contribution lifted the company’s headline operating margin, excluding energy surcharges, from 16.1 per cent to 17.3 per cent.

Outgoing chief executive Stephen Harris told investors that Bodycote “should continue to keep this journey going”. It has a medium-term target of reaching a margin above 20 per cent, and Harris argued the company’s “natural margins should be in the low-20s”.

The higher profit was converted into cash, with free cash flow increasing by 46 per cent to £122.5mn, and even after spending £28mn on expansionary capex it finished the year with net cash (excluding leases) of £12.6mn. Although the completion of its acquisition of Indiana-based Lake City Heat Treating for £52mn in January means it now has net debt of £40mn, the amount of cash it is generating has allowed it to kick off a £60mn buyback after a deal for a second US business, Stack Metallurgical Group, was abandoned.

The company expects to “deliver further progress” this year, even on the assumption that global industrial production remains flat. Analysts at HSBC think it will pick up and forecast an 8 per cent increase in Bodycote's earnings per share to 52.1p. The shares trade on a forward price/earnings (PE) ratio of 12.5 times, below their five-year average of 15 times. Buy.

Last IC view: Buy, 578p, 18 Jan 2024