HSBC downgrades Bodycote to 'hold' on valuation

HSBC has downgraded Bodycote to ‘hold’ from ‘buy’ with an unchanged target price of 675p ahead of the metal-treating specialist’s 2016 results, as it believes its stock is currently fairly valued.

The bank downgraded the FTSE 250 company as its shares have gained about 23% since December and have outperformed the FTSE 100 by 14% over the same period.

It said that Bodycote’s action on its footprint and a selective focus on business mix have led to improved growth and margins, and it thinks that the recent economic malaise is a further opportunity for the company to demonstrate its enhanced earnings quality.

“We see long-term margin expansion potential driven by new technologies, as adoption rates evolve and the positive impact from its core activities as global network build-out continues; and Bodycote has a nil-geared balance sheet and is highly cash-generative given its high margins (mid-teen), limited working capital requirements, low pension deficit and low maintenance capex requirements,” analysts wrote.

HSBC’s unchanged target price of 675p equates to a 2018 estimated exit price/earnings ratio of 15.3 times and a 2018 estimated exit enterprise value to earnings before interest, tax depreciation and amortisation (EBITDA) of 6.7 times. The target price implies a downside of 4.9%.

Bodycote will publish results for the 2016 financial year on 28 February and HSBC expects second half sales to rise 9% year-on-year to £290m buoyed by a strong foreign exchange gain, which will offset a 6% organic decline due to sequential improvement in the fourth quarter.

HSBC also expects full year revenue to grow 2.5% to £581m and a headline operating profit margin of 17.4%, down 60 basis points, driving headline operating profit of £101m, down 1%.

Shares in Bodycote were up 0.14% to 705.50p at 0815 GMT.