Born-again chain shows its mettle

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The Independent Online
Bodycote International, led for many years by Joe Dwek, has achieved a remarkable transformation. Twenty years ago it was a textiles group, battling with a tide of cheap imports. But since the late 1980s it has reinvented itself as a specialist engineering company operating an increasingly international chain of plants offering metal technology services such as heat treatment and metals testing.

This classic transition from sunset to sunrise industry has already produced great results, with profits up more than 23-fold since 1982. Over the past year, the number of plants has climbed by almost half from around 50 to 72 - nine of the newcomers in the past six months.

Finance director Roger Green says the progress means Bodycote has already completed two-thirds of its latest three-year programme after just 12 months. As a result, the plan has been revised with an "unbelievable" number of plants targeted to be operational in three years.

The group makes most of its profits from four services - heat treatment, hot isostatic processing (HIPping), materials testing and anti-corrosion coatings. Equipment manufacture came in as a sideline with recent acquisitions and is now being evaluated. All the service activities relate to improving the properties of metals, with many customers in the aerospace and power engineering industries.

Part of the growth has come from taking advantage of falling costs to widen the range of applications, bringing in customers in many other fields. For example, in the United States, Mack Trucks had a problem with a key engine part - a valve lifter - which kept on failing. The problem was solved by using the HIPping process.

There is healthy momentum across the board, with profits up 44 per cent in the latest half year. But HIPping is the jewel in the crown. It is a relatively new technology which uses very high pressures and temperatures to achieve remarkable changes in metals and other materials. For example, it can remove porosity from a cast stainless steel golf club head, greatly improving its performance. It can turn powdered metal into solid high- performance steel for use in special components or in rugged environments. It can also bond different materials, such as tungsten carbide, to steel to manufacture unique products.

Bodycote dominates the market for HIPping with an estimated 70 per cent of the US market and an even higher share in the UK and continental Europe. The demand for HIPping is expected to grow at 15-20 per cent for what is already Bodycote's single largest profit centre. In the latest half year, HIPping made operating profits of pounds 4.5m on sales of pounds 15.2m.

The group began with an acquisition in 1991. Helped by further deals and greenfield openings, it has two plants in the UK, two in mainland Europe and five in the US.

Acquisitions generally have played a key role in the group's growth. A typical example is the recently announced purchase of Lymington Plating, a Poole-based metallurgical coating operation - Bodycote paid pounds 5.5m up front for profits of pounds 1.1m. This will give a powerful boost to the metal coatings division in 1997. In the latest half year this division made profits of pounds 1m on turnover of pounds 6.4m.

An attractive feature of all the operations is high margins. Heat treatment, with a mouth watering operating margin of 19 per cent, is actually the least profitable of the four service divisions. The overall group operating margin at the halfway mark was 21 per cent.

Over the past five years the group has invested pounds 60m, with a further pounds 20m budgeted for this year.The sale of non-core activities raised pounds 19m. Equipment manufacturing activities made profits last year of pounds 1.3m on sales of pounds 11.3m.

Analysts are looking for profits to reach pounds 25m-plus this year and then around pounds 30m, implying a price-earnings ratio of 23.8, falling to 20 at the current 698p share price. High, but fully deserved as those forecasts may well be beaten.