Berenberg lowers target price on Bodycote

Berenberg said the near-term outlook for the group may be "cloudier than usual" given Bodycote's cyclicality, but it stated the longer-term opportunities for investors were "far clearer".

The German bank said Bodycote's January-April trading update was "encouraging", with demand remaining "robust" across the business and aerospace and general industrial markets being particularly strong.

On the other hand, Berenberg stated April, in particular, highlighted the severe supply chain and inflationary challenges being faced by Bodycote and its customers – something that is causing "significant volatility" in trading week over week and depressing margins until mitigated by pricing actions.

However, Berenberg still expects year-on-year full-year revenue growth despite increased costs putting underlying earnings on a course towards the lower end of consensus with risk to the upside or downside predominantly coming from higher or lower volumes. It also said mid-term opportunities for the stock were "compelling".

"This is a high-quality business that should expand margins to 20%, and benefit from outsourcing and sustainability trends while continuing to deliver sector-leading cash generation that will likely result in M&A and/or attractive cash returns to shareholders," said Berenberg.

"We, therefore, believe an 8.1% 2023 FCF yield remains appealing and retain our 'buy' recommendation."

Reporting by Iain Gilbert at Sharecast.com