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.
Bodycote
574.00p
16:45 04/10/24
FTSE 250
20,900.08
17:14 04/10/24
FTSE 350
4,570.17
17:14 04/10/24
FTSE All-Share
4,527.24
16:54 04/10/24
Industrial Engineering
12,279.38
17:14 04/10/24
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.