Berenberg starts coverage of Bodycote at ‘buy’

"Bodycote’s financial framework is targeting 20% operating margins in the medium term, with low-investment requirements and self-help opportunities, gearing towards industrial cyclical recovery and strong cash generation, which we believe is undervalued at current levels compared to the industrial engineering sector," the bank said.

It said Bodycote is an early-cycle operationally-geared industrial recovery play.

"While industrial indicators are weak and visibility is low, along with other factors we note here, the exposure to a recovery is very high compared to our broader industrials coverage," Berenberg said.

"Furthermore, on a 12-month view, with comps easing and the likelihood of industrial markets stabilising, we believe that there is the potential for earnings to accelerate, although we also note that our EPS forecasts for 2025 are slightly ahead of consensus forecasts."

In addition, it said Bodycote has one of the highest exposures in the bank’s coverage to attractive aerospace and defence markets, which should underpin group growth in the medium term.

Berenberg noted that Bodycote has historically maintained a strong balance sheet, with low investment requirements and resulting strong cash generation.

"This provides scope for further M&A and improved returns to shareholders, in addition to the current £60m share buyback," it said.

Berenberg also pointed to an attractive valuation, with Bodycote trading on 12.7x FY 2024E price-to-earnings and 10.1x FY 2024 EV/EBIT.

"These are substantial discounts to Bodycote’s own historical levels as well as the sector relative history of 15% and 16% on a P/E basis respectively," it said.

"The stock has rarely traded this low in comparison to its sector, thus suggesting to us that the stock is pricing-in a lot of cyclical headwinds and not much credit for self-help initiatives."