Is this ‘misunderstood’ firm worth 50% more?

FTSE 250-listed Bodycote (LSE:BOY) was today described as a “misunderstood improvement story” after a City bank said the shares deserved to be trading more than 50% higher.

The heat treatment and specialist thermal processing firm, which has been stock market listed since 1972, topped £10 in 2018 when investors bought into its higher margin growth story.

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Apart from a post-Covid recovery to 945p in September 2021, the shares have suffered under the weight of macroeconomic factors to stand as low as 565p last October.

Frustration over the slow ramp-up of civil aerospace volumes and impact of the 2022-23 energy crisis have also hindered its performance in comparison with peers such as IMI (LSE:IMI), Spectris (LSE:SXS) and Renishaw (LSE:RSW) over the last two years.

But UBS sees a “drumbeat of soft catalysts” as offering potential for an inflection in sentiment. 

The bank today increased its price target by 25p to 965p and highlighted three reasons why the market may have got it wrong on Bodycote. It said: “Valuation is too hard to ignore for this misunderstood improvement story.”

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When Bodycote last updated on trading, its revenues were 10% higher at £677 million for the four months to 31 October as aerospace and defence grew by 13% but automotive fell 2%.

Through specialist technologies and classical heat treatment, Bodycote improves the properties of metals and alloys, extending the life of vital components for a wide range of industries.

The higher margin specialist technologies portion of both divisions achieved revenue growth of 8%, highlighting to UBS what it sees as a “credible path” to achieving margins of 20% and above.

For now, it believes that post-Covid macro impacts have masked an improvement in the earnings quality at Bodycote. It also highlights the company’s reporting complexity and risk of strategic ambiguity as two other factors why Bodycote may have been misunderstood by investors.

UBS added: “Margin enhancement and reduced volatility are pillars of the strategy but recent market share gains in classic heat treatment may potentially raise the perception that growth is being prioritised. 

“We see an improved business but sympathise with investors who have found easier improvement stories elsewhere.” 

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The shares today stood at 637.5p, having rallied in recent days after the company took another step in the growth of specialist technologies through the acquisition of Lake City HT. 

The Indiana-based business supplies the orthopaedic implant market, boosting Bodycote's customer reach in the medical market.

As a separate previously announced acquisition is no longer going ahead, the company said it instead planned to buyback £60 million of its shares starting in March.

US bank Jefferies, which has a price target of 900p, said: “The group is in good shape operationally and financially and the LCHT acquisition is being done at an attractive multiple, in our view.”