More on Bodycote
Bodycote AGM statement
Bodycote continues to recover from the slump in 2002, as discussed when we previously covered the company. At the AGM, Bodycote gave a trading update, which indicates that sales are continuing to increase.
The recovery is being driven by a recovery in Bodycote’s customers. Bodycote sells services to various industries such as the aerospace market, the power generation market and the oil & gas industries amongst others. The recovery of these markets from the end of 2003, and the restructuring by closing or selling loss making plants increased operating profit in the previous year. Bodycote is operationally geared, hence the increase in turnover should increase profits.
Turnover growth across all businesses is largely organic. Bodycote’s heat treatment (eg: hardening, annealing, joining of metals, 60% of operating profit) business sales were up 7% at CER (5% organic growth ). Other businesses showed similar patterns.
Energy prices are an overhang for profit growth as are higher wages; however Bodycote will pass on such increases. The weakening of the dollar, will impact reported profits.
Bodycote shares trade at a prospective PE of 12.9× (at 169.8p) in line with the sector as is the 3.8% yield. In 2004 the free cash flow per share of 17.8p was greater than the 11.3p EPS reflecting good cash generation. The planed disposal of loss making subsidiaries and the contribution of acquisitions will enhance profits. The rights issue in 2004 strengthened the balance sheet and as will planned disposals put Bodycote position to make acquisitions (which it plans). Both Bodycote’s track record and its announced plans have been for small bolt-on acquisitions so we do not view this with concern. The major risk (both the upside and the downside) to the stock stems from the effects that the cyclical nature of Bodycote’s services combined with the operational gearing have on results.
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