Bodycote turnaround slowed by automotive and aerospace markets

There have been clear signs of progress at engineering group Bodycote (BOY) over the past year, although the delayed recovery of both the aerospace and the automotive industries weighed on its prospects. 

The company’s revenue edged up by 3 per cent (or just 1.3 per cent in organic terms) to £616mn, which was slightly below the analysts’ consensus estimate of £619mn. Earnings per share of 35.8p were also lower than the consensus estimate of 36.7p.

Restructuring charges that wiped out last year’s profit lessened as work on Bodycote's transformation plan completed. The company has closed 26 plants and opened five new ones, transferring “virtually all” of its productive assets into facilities in higher growth markets, it said. 

Although it took a further £8.5mn restructuring charge in 2021, mainly due to asset impairments, the programme has delivered about £30mn of permanent cost savings, the company said. Its headline operating margin increased to 15.4 per cent, from 12.6 per cent in 2020.

End markets were a mixed bag. Business from general industrial customers  grew by 14 per cent, but aerospace and defence revenue fell by 1 per cent, or 7 per cent on an organic basis and remains a third lower than in 2019. Automotive revenue rose 9 per cent year on year, but the chip shortage disrupting global production meant it remains 13 per cent below 2019 levels. 

Bodycote said there are signs shortages in the sector “are starting to abate”, though.

Although the company has no direct exposure to Russia, Belarus or Ukraine, the jump in energy prices that has taken place since war broke out has meant higher costs for a company whose work involves heat treatment and thermal processing of parts.

Energy prices equate to about 10 per cent of current sales and the company argued it had been able to pass these on “year in, year out” for the past decade. However, it does so either through surcharges or contract indexation. Using the latter method, which it does for about 20 per cent of its business, can lead to a lag to recovery of between six to 12 months, which is not inconsequential given the scale of recent price increases. 

Broker Jefferies said it expects downward revisions to Bodycote's consensus earnings forecast for the year ahead of £121mn, given cost and foreign exchange headwinds. These pressures, and a lack of firm evidence of a recovery in aerospace or automotive, mean we don’t see yet any reason for changing our recommendation. Sell. 

Last IC View: Sell, 796p,12 Mar 2021