Bodycote acquisitions turn up heat

The Investment Column
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The Independent Online
Bodycote International and its chairman, Joe Dwek, are two of the more successful remnants of the ill-fated Slater Walker empire of the 1970s. They owe much of their good fortune to a management team led by chief executive John Chesworth, who has successfully re-engineered the group over the last 18 years or so. The last of the original textile interests - a bullet-proof vest manufacturer - was dumped earlier this month and through a series of acquisitions Mr Chesworth has created one of the biggest independent metal heat treatment groups in the UK.

That helped it yesterday to reveal a 46 per cent rise in pre-tax profits to pounds 27.6m for 1996. If analysts' forecasts of pounds 46m for the current year are right, the figure will have multiplied by over 10 times in 11 years. The market has taken time to recognise these achievements, but, after a 32.5p rise to 770p yesterday, the shares are nearly double their price 18 months ago, putting them on a forward multiple of 19.

This sort of heady rating is normally accorded companies at the leading edge of technology, yet Mr Chesworth is the first to acknowledge that his is neither a hi-tech or highly priced line of work, describing Bodycote as a plant hire business that sells time on its furnaces. But its equipment has proved itself more efficient and more reliable than others.

Heavy capital investment, set to almost double to pounds 37.6m this year, has helped Bodycote grab a significant share of the market for heat treating other manufacturers' components in every industry from aerospace to electric hand tools, giving them hardness and durability. There is still plenty more to go for. Bodycote reckons it has less than a fifth of an outsourced UK market put at pounds 100m, while three-quarters of heat treatment work is still carried out in-house.

Despite the modesty of Mr Chesworth's description, Bodycote has some fairly whizzy businesses. Its commanding position in hot isostatic processing takes it into high-integrity applications like aero-engine blades.

The outlook for the 18 per cent of the group's sales into the currently booming aerospace industry is set fair, while automotive, a further 22 per cent of the business, is looking reasonable, at least in the Anglo- Saxon countries. But the main short-term excitement at Bodycote remains acquisition-led.

Last year it spent pounds 112m, including debt, on 10 purchases, culminating in Brukens of Sweden, making it one of Europe's biggest heat treatment groups. Around three-quarters of last year's profits growth came from acquisitions and analysts expect Brukens to chip in over pounds 10m to this year's figures. It is targeting heat treatment and laboratory testing companies in the US and talking to some, backed by pounds 20m of net cash which could give it up to pounds 80m in firepower.

Well clear of last November's rights issue at 600p, the shares are a firm hold as one of the select band of high-growth engineering companies.

JJB figures set more records

The quoted sports retailers have been having a high old time of it recently. Buoyed by the increasing popularity of branded sportswear and helped by the fragmented ownership of sports shops, the likes of JJB Sports, JD Sports and Blacks Leisure have been enjoying huge profits growth and soaring share prices.

JJB Sports, the chain founded by former footballer Dave Whelan in 1971, confirmed the growth trend yesterday with another bumper set of figures. Profits were 58 per cent ahead at pounds 20.3m for the year to 31 January. Even more impressive were the like-for-like sales figures, which grew by an astonishing 38 per cent over the year and are also up strongly in current trading. However, the latest 11 weeks are being set against a weak comparable period for last year when bad weather affected sales.

JJB is certainly an impressive story and the shares have now risen more than sixfold since the flotation in late 1994. They jumped another 5p yesterday to close at a record high of 429p. It now has 167 stores and opened 25 new superstores over the year and a further eight since the year-end. Next year it will open 39 more outlets.

The company has abandoned its experiment in Spain and is closing its three stores at a cost of pounds 387,000. More ambitious, however, is the plan to convert some of the smaller stores to a new format aimed at children aged two to 10.

Called Future Stars, the plan is to capitalise on the market for junior replica kits and tiny training shoes. This has raised some eyebrows in the City as this is seen as a risky market.

While the JJB tale is obviously an impressive story, the problem for potential investors is its rather frightening rating.

On forecast profits of pounds 27m, the shares trade on a prospective price- earnings ratio of 23, which is higher than its rivals JD Sports and substantially more than Blacks Leisure, which is on a rating of 16. JJB is clearly a quality company but there may be better value elsewhere.

Cobham steps on road to recovery

Cobham is a good case study in the investment roller-coaster companies can ride if they disappoint a market that has fallen in love with their strategy. Eighteen months ago the market's perception of the aerospace and precision engineering group was transformed by its pounds 75m acquisition of Westwind, which took it into the semiconductor market for the first time.

Its shares almost doubled in a year, jumping to a sizeable premium to the market, but disappointment at the new acquisition's progress has left the shares in limbo since.

Yesterday the company set out on the road to recovery with a 47 per cent increase in profits before tax to pounds 43.7m and 24 per cent rise in earnings per share coming in bang in line with analysts' expectations. More importantly, Cobham had an impressive order book to show the City and good news to tell on Westwind's progress, which sent the shares 35p higher to 652.5p, close to the 669.5p high reached at the end of last year.

Although sales of its air bearing spindles, used to control the manufacture of printed circuit boards, have been slower to materialise than brokers hoped it now looks as if once they get going volumes will be much higher than previously thought. New applications for the technology, such as the manufacture of scanning devices, look to have good potential as well and initial expectations that Westwind could grow profits at 20 per cent a year have been resurrected.

Westwind is only a small part of the group as a whole, so more important in anything other than sentiment terms was the slew of new orders last year such as contract awards for the British Aerospace Nimrod 2000 maritime patrol aircraft and the GEC Phoenix battlefield surveillance system. Initial deliveries were also made for a tanker conversion programme for Boeing.

With the core defence business arguably in much better shape than a year ago, it would not be unreasonable for Cobham's shares to recover the premium rating they lost last summer. On the basis of forecast profits before tax of pounds 49m this year and pounds 55.5m next time the shares trade on a price/earnings ratio of 18, falling to 16. That accounts for most of the good news, but analysts believe the recovery could continue to as much as 700p in the medium term. Good value.

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