This report is an updated version of the report published on 17 June 2022 at 08:17 AM GMT+1

Bodycote PLC (LON: BOY)

Bodycote PLC (LON: BOY) is an FTSE 250 listed Company that provides heat treatment and specialist thermal processing services. Moreover, Bodycote operates across two major business division – ADE (aerospace, defence, & energy) and AGI (automotive & general industrial). Overall, BOY has 165 facilities around the globe across both business segments.

Recent trend of dividend payments

The Company has a progressive dividend policy of paying its shareholders around 2.0 times earnings on a 'normalised' multi-year basis. Moreover, the Company had paid a final dividend of 13.8 pence per share on 03 June 2022 with an ex-dividend date of 22 April 2022. It will take the full-year dividend of 20.0 pence per share. In comparison, it had paid a total dividend of 19.4 pence per share for the prior year.

 (Source: LSE, chart created by Kalkine Group)

Growth Prospects

• Strategic Priorities: The Company aims to accelerate its investments in emerging markets. Furthermore, BOY had shown an increase of around 17% in revenue across Emerging markets during FY21.
• Strong Divisional Performance: The continued capital investment in several markets had resulted in 21% higher General Industrials division revenue during the first four months of FY22 when compared with an equivalent period of FY21. The aerospace & defence revenues also surged 18% year-on-year during the first four months of FY22.

Key Risks 

• Material Shortage: The material shortages because of supply disruptions in China has adversely impacted the financial performance in April 2022.
• Federal Reserve Rate Hike: The Federal Reserve has announced its biggest interest rate hike since 1994, an increase of around 75 basis points, while also pointing to further steady rises this year. Moreover, the Bank of England also came up with a fifth consecutive interest rate hike of 0.25% on 16 June 2022.
• Weak UK GDP Numbers: According to the Office for National Statistics, the UK GDP grew only 0.2% for the three months through April 2022 after 0.8% in the previous three-month period.

Key Fundamental and Shareholders Statistics of Bodycote PLC.

Aberdeen Standard Investments (Edinburgh) is the most significant shareholder as it holds nearly 19.19 million shares.

FY21 Financial Highlights (for the year ended 31 December 2021, as of 14 March 2022)

(Source: Company Filings)

• Top-Line Business: The Company’s top-line revenue grew by around 7.1% at constant currency, from £598.0 million during FY20 to £615.8 million for FY21.
• Profitability: On the profitability front, the headline operating margin remained 15.4% during FY21. In comparison, it was 12.6% for FY20.
• Balance Sheet: The net debt stood at £52.0 million as of 31 December 2021.

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 16 June 2022, BOY’s shares were closed at GBX 571.00, down by around 6.16% against the previous day closing price. Stock 52-week High and Low were GBX 1,007.00 and GBX 569.50, respectively.

On a daily chart, the stock price is hovering below the lower Bollinger band, indicating an upside potential in the stock price. Also, the 14-days RSI of ~33.28 approaches oversold territory.

Valuation Methodology: Price/Earnings Approach (FY22E) (Illustrative)

Business Outlook

The Company has carried the positive business momentum of FY21 into the first four months of FY22 with significant year-on-year revenue growth in most of its business divisions. Moreover, the strong growth in Eastern Europe has mitigated the weak performance in Chinese markets and resulted in improved top-line business in Emerging Markets. Overall, the Company remained optimistic regarding its long-term outlook driven by continued good performance in the general industrial business, and further growth in civil aerospace revenues.

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the accelerated recovery in several business divisions, consistent dividend payments, decent financial performance, and support from the valuation as done using the above method, we have given a “Buy” recommendation on Bodycote PLC at the closing market price of GBX 571.00 (as of 16 June 2022), with lower-double digit upside potential based on 15.87x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: Dividend Yield may vary as per the stock price movement.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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