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Bodycote’s growth strategy pays off

Management at the heat treatment engineer expects sales to be ahead of consensus
July 27, 2018

Bodycote’s (BOY) growth strategy continues to take analysts by surprise. Having upgraded its guidance in May, the specialist heat treatment engineer’s management team opted to strike a bullish tone once again on results day, confidently predicting that full-year figures will come in “marginally ahead” of current consensus.

IC TIP: Hold at 1,028p

Chief executive Stephen Harris admitted that an improving resources market backdrop has lifted the overall general industrial sector, but also added that much of Bodycote’s success is now down to its own actions. Investing in high-margin specialist technology products and emerging markets, he claimed, has steadily transformed the engineer from a sputtering cyclical business into a lean, mean outperformer.

Evidence of the group’s transformation can be found in the profit margins. Return on sales widened by 1.2 percentage points to 19 per cent in the period, underlining Bodycote’s increasingly strong pricing power. Meanwhile, the engineer also thrived in sectors that many of its peers have described as soft. One such example is the automotive market, where Bodycote grew revenues at constant currencies by 9.4 per cent to £100m.

Free cash flow was less inspiring, though, falling 6 per cent to £39.4m. However, management’s admission that payments of staff bonuses and seasonal outflows on trade receivables were to blame suggest that there are no real causes for alarm here.

Credit Suisse expects adjusted pre-tax profit of £136m for the year to December 2018, and adjusted EPS of 53.87p, against £121.5m and 49.83p in 2017.

BODYCOTE (BOY)   
ORD PRICE:1,028pMARKET VALUE:£1.97bn
TOUCH:1,027-1,029p12-MONTH HIGH:1,077pLOW: 813p
DIVIDEND YIELD:1.7%PE RATIO:19
NET ASSET VALUE:355p*NET CASH:£5.6m
Half-year to 30 JuneTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201734658.222.95.3
201836867.226.65.7
% change+6+15+16+8
Ex-div:04 Oct   
Payment:02 Nov   
*Includes intangible assets of £200m, or 105p a share