After spending several years under the radar, Bodycote may be about to break through on to investors’ screens. Unloved as a formerly old-fashioned metal-basher, its operations can be summarised prosaically as “takes metal and makes it harder”. But now, with the advent of modern, low-carbon technology, that has developed into injecting maximum energy-saving efficiency into oilrigs, aircraft and civil and military vehicles. It is thus double-haloed: green and Ukraine. Happily, the new technologies come with higher growth rates and fatter margins. To top off the mix, in March a new chief executive, Jim Fairbairn, arrived with a strong pedigree and a brief to take the group to a new level.
There are two main divisions: aerospace, defence and energy, generating 45 per cent of revenue, and automotive and general industrial, making up the remaining 55 per cent, catering for electric and hybrid vehicles. The aerospace and defence operations harden metals for Boeing and other aircraft builders, while the energy unit sells to the oil and gas industries. The automotive and general industrial unit serves General Motors, Caterpillar and other heavyweights.
Bodycote employs more than 5,000 people to reach 40,000 customers through processing treatment plants in China, Mexico, Britain and North America. Heat treatments account for about three quarters of its total output, the other quarter coming from the high-margin specialist technologies that look to be the main focus for the next few years.
The aerospace and defence division was knocked sideways by the pandemic, partly because nobody was flying for most of 2020, but it is now picking itself up off the ground. Sales last year were up from £743.6 million to £802.5 million, with operating profit £15 million higher at £127.6 million. The headline pre-tax profit was £120.1 million, against £105.5 million previously. Earnings per share rose from 42.7p to 48.4p. The dividend rose by 1.4p to 22.7p, leaving plenty of cover against future shocks. However, the growth rate tapered off in the second half of the year, hit by a United Auto Workers’ strike in the United States applying a brake to vehicle revenues and by slowdowns in China and eastern Europe.
Henry Flockhart, of Artemis Fund Managers, which holds 5 per cent of the shares, believes Bodycote is at a turning point, arguing that “a recovery in end markets should lead to better operating leverage for Bodycote than the market anticipates, as the headwinds over the past four years have masked the internal improvement”. Nevertheless, revenue fell in the first four months of this year because underlying growth was offset by surcharges that halved as energy prices fell. That shows a high correlation to overall industrial production, a plus at this stage in the cycle but a factor to keep a wary eye on ahead of the next downturn.
Attention should switch to the new technologies, which strengthen stainless steel and squeeze air out of metal to make it more durable. Not only does this segment enjoy 25 per cent profit margins, it is also outgrowing the traditional operations.
Those trends should be boosted by Fairbairn’s arrival. He comes with a fresh pair of eyes and a CV steeped in engineering, telling shareholders at the recent annual meeting that he had been touring the business and reviewing “strategic and operational priorities”. Expect the result of his musings with the half-year numbers. Meanwhile, he brings an unusual extra ingredient, as a part-time management guru. He has written two books with the challenging titles of Nothing Changes Until You Do and The Game of Business and How to Play to Win. After a decade’s research, he concluded that success has nothing to do with luck. No excuses, then.
Stephan Klepp, the HSBC’s analyst, sees Bodycote as “an early cyclical beneficiary of an improving macroeconomic environment. It is one of the most underestimated UK industrials, much more resilient than investors are currently appreciating. We reiterate our view that it is a very interesting investment proposition at this point in the cycle.” He expects the price-earnings ratio on the present 727p share price to fall to 10.5 for 2026 and the dividend yield to rise to 3.7 per cent. His target price is 950p.
Advice Buy
Why This looks like the bottom of the cycle, generating exciting prospects
Carnival
A year ago this column recommended buying Carnival shares at 897p. After reaching £13.77, they have settled at a comfortable £11 or so.
They are among the more volatile shares, regularly featuring in the day’s top ten fallers or risers. That may say something about their investor profile, with listings in London and New York, but the company is in an industry prone to excessive bouts of hope and disappointment. Hope is the mood of the moment as the global hospitality industry puts Covid behind it and focuses on the serious business of partying.
Carnival is the world’s biggest cruise company, sailing under the Cunard, P&O Cruises (nothing to do with P&O Ferries), Princess Cruises and several other flags. This month Cunard put out the bunting in Liverpool to launch the 3,000-passenger ship Queen Anne, which has several cinemas, pools and ballrooms. A high customer age profile means it can expand only by attracting more young first-timers, turning cruise liners increasingly into floating holiday camps.
In a business with such expensive assets, accurate financing is crucial. The company is simplifying its capital structure, refinancing where possible, prioritising unsecured debt, turning debt into equity and prepaying debt to cut interest. It has prepaid $2.6 billion of debt this year, out of an expected $29 billion when the half-year numbers are totalled for the end of May.
In the first three months of the year, revenue rose from $4.4 billion a year previously to $5.4 billion, helped by this year’s extra day in February. It was notable that while passenger ticket sales rose by 28 per cent in cash terms, onboard and other turnover added only 12.8 per cent. That suggests more customers are whiling away the cruises in poolside loungers and fewer are propping up the bars. Operating expenses rose by only $600 million to $3.7 billion. After administration, depreciation and amortization, the business turned a $172 million loss to a $276 million profit. Second-quarter earnings will be announced on Tuesday next week.
Advice Buy
Why The shares are cruising
