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BOC
BOC’s first quarter of 2005 continued the previous year’s growth with turnover up 8% and operating profit (pre exceptional) up 10% at constant exchange rates (CER). In sterling terms, first quarter turnover was up 5% to £1.2bn, operating profit was up 7% to £137m.
Turnover was up double digits at CER across all BOC’s businesses, except in the industrial and special products business, which was down largely due to a disposal. Operating profit growth too was up double digits across all businesses, except in the industrial and special products business (up 6%).
Industrial and special products business (sales mainly to customers in the fabrication, medical and scientific sectors, 50.6% of operating profit) turnover was down due to the disposal of the US packaged gas business. However continuing businesses turnover was up 6% due volume growth and price increases. Operating profit grew 6% as the company passed on increasing energy prices, helped by a reduction in overhead costs in America.
Process gas solutions (installs and operates plants for industrial customers, 33.6% of operating profit) increased turnover and operating profit on higher volumes and prices. CER turnover increased by 16%, but operating profit grew by 11% which means the company is still to completely recover the increases in cost.
BOC Edward (which supplies the semiconductor industry) operating profit was up 67% to £9.5m (6.5% of operating profit) as turnover increased by 23%. However, operating profit was lower than the last to quarters of the previous year due to lower volumes. The company plans to reduce costs by buying lower priced products from countries whose currency fluctuates with the dollar. With costs in sterling but sales in US dollars margins will continue to weaken unless the cost cutting works.
Operating cash flow for this quarter was lower than the corresponding period. BOC paid creditors relating to the Afrox hospital business early due to new legislation in South Africa. Cash flow should return to normal levels in the following quarters.
The medium term outlook is positive. New investments (in joint ventures and subsidiaries) in the process gas solutions business will increased total operating profit by c 5% within the next two to three years. The disposal is expects to increase profit by c £10m by reducing overhead costs.
The downside to the stock lies mostly in the risk of higher raw material prices and its vulnerability to any further weakening of the dollar.
The share trades at a prospective PE of 13.8× at the lower end of the rage for the sector. The 4.3% yield is at the higher end of the range for the sector.
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