UK Edition
Cars, planes and oil rigs sounds like the title of an Eighties buddy movie gone wrong. In investment terms, it has the potential to be a horror flick given the current state of all three industries to which these machines belong.
Yet Bodycote, a company sat in the crosshairs of the automotive, aerospace, defence and energy worlds, is not buckling in the heat of the moment.
The firm, whose roots go back almost a century, is a specialist in high-temperature treatments that toughen metals and alloys used in a broad spread of manufacturing, and it operates from 160 plants globally.
In late May, it reported that underlying revenues had collapsed by 35pc in April as production by many of its customers ground to a halt because of the pandemic.
Despite suspending financial guidance, the commentary from Stephen Harris, the chief executive, appeared to reassure the City that trading would stabilise from there. This could be the crisis that Harris, a veteran of Spectris, the instrumentation firm, has been waiting for.
He joined Bodycote at the start of 2009. That was the year of the last recession, when operating profits fell by £63m to a skimpy £8m.
Much work has been done in the past decade or so to persuade investors that these days Bodycote can insulate itself better in a downturn.
Witness the latest restructuring plan to save £45m a year, which will cut 700 jobs, or 13pc of the total.
Some of these workers are based at plants where demand is not expected to return and so will be closed. But Bodycote aims to keep the same production capacity, just in better locations, which spells bad news for heat treatment facilities that serve carmakers in western Europe. In addition, £7m has been squeezed from monthly costs.
The revival in aerospace looks like being long and difficult but automotive is more encouraging; there were early signs of a recovery in US car sales in May.
Bodycote, which suffers immediately when customers run down inventory, has the flexibility to switch some plants between industries. What could put a dampener on things is more trade war sabre-rattling.
Company followers at UBS have pencilled in a 22pc contraction in underlying sales this year, with an 8pc rebound in 2021. Analysts at Liberum, the broker, have stress-tested the balance sheet and concluded that even if 2009’s 90pc bottom-line decline were repeated, borrowings would rise to no more than twice the level of earnings, which is manageable. Consequently, it is highly unlikely the dividend will disappear.
Market sentiment will depend on how the company has fared in June and for that we must wait until interim figures late next month. However, it is not enough for investors to risk their money on a business whose performance is merely less bad than during the last crisis.
There are hopes that Bodycote’s investment in new, specialist technologies, which command margins of around 30pc, will boost the firm, which delivered an overall 18.7pc margin last year.
These processes, such as hot isostatic pressing, which strengthens components by applying extreme pressure and heat, and surface technology, where ceramics or metal coatings are applied to the product, contribute a quarter of group sales and have high barriers to entry.
Specialist sales grew at only 3pc last year but the long-term trend is better. Bodycote is adding in this area, such as with the £162m acquisition of Ellison Surface Technologies, completed in April.
Looking further out, the drive for efficiencies across several industries may dislodge more work for Bodycote.
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Currently, around four fifths of heat treatment is carried out in-house by manufacturers that will be forced to rethink their priorities.
The shares are changing hands at 18pc below the level at which Questor advised readers to avoid them in November 2018. Now, the outlook is less clear but Bodycote’s ability to cope has improved.
Trading at 13 times forecast earnings for 2021, the stock is bang in line with the company’s long-term average. If it can remain resilient through this year, a re-rating is likely. For that reason, Bodycote shares are worth a punt.
Questor says: buy
Ticker: BOY
Share price at close: 632p
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