The Investment column: Bodycote metals fail to shine

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The Independent Online
BODYCOTE INTERNATIONAL, the metals group which hinted in March that its markets might be showing a glimmer of recovery, disappointed the City yesterday with news that the much-needed upturn had failed to materialise.

Although half-year profits were in line with an 8 per cent increase to pounds 40.8m before exceptionals, the let-down was in the outlook statement which said global market conditions remain uncertain. It was this that pushed the shares down 7 per cent to 391.5p.

The dip is not surprising given that this is a company the City wants to believe in. It already trades at a premium to the rest of the engineering sector and there is some merit to the argument that much of Bodycote's business is in more highly rated services than manufacturing. Functions such as heat treatment and the provision of metal coatings may be fragmented but Bodycote enjoys margins of around 20 per cent in many of these operations.

They are also being expanded. The coatings division was boosted by acquisitions in the UK, France and Sweden in the period. In heat treatment, businesses were added in the US and Austria.

The US remains the prize where around 90 per cent of metals processing is handled in-house. That leaves great potential if a significant trend towards outsourcing develops.

But organic sales growth was virtually non-existent at just 0.5 per cent and weak industrial activity in Bodycote's major markets may mean the shares struggle to make any headway in the short term.

Assuming full-year profits of pounds 83.5m, the company may be under-valued on a forward price-earnings ratio of 17. But buyers should hold off until there is firm evidence of improvement in industrial markets.


SO BICC has grasped the nettle. And what a stinger it was: a loss for the first six months of 1999 of pounds 392m when all the provisions, disposal costs and sundry expenses of getting rid if its core cables business are taken into account.

Such numbing numbers owe much to accounting rules and little to the cash position of the business. But even so it shows the true cost of BICC's ill-considered buying spree in the cables industry over the past 10 years.

Long-term shareholders are nursing losses approaching 80 per cent, and the company's status as a British industrial bellwether and member of the FTSE 100 is a distant memory. Some might even hanker for last April's rebuffed 110p a share approach from Wassall.

But all is not lost. Left behind is the profitable Balfour Beatty construction business, which will be the new name for the group before long.

Balfour Beatty has its fingers in all sorts of interesting pies. It is Britain's biggest railway construction contractor, and thus well placed to take advantage of the billions of pounds of capital investment that Railtrack keeps promising.

In addition, the company is heavily involved in the government's Private Finance Initiative, which may yet prove a lucrative playing field.

The problem for investors is that they only have the promises of better times to come from incoming chief executive Mike Welton to go on.

Peering through the thicket of the accounting-related provisions that produced this spectacular first-half loss, analysts predict that profits next year will be around pounds 53m, putting the shares - up 2.5p at 96.5p yesterday - on a forward p/e of about nine. This is just shy of fellow contractor Amec's rating.

For braver investors, this is the opportunity to pick a recovery stock. But in the absence of solid financials, the sensible course is to stay on the sidelines until the dust clears.

Weir Group

FIRST-HALF fortunes were mixed for Weir Group, the Glasgow-based engineering firm which turned down a pounds 600m approach from Flowserve in February. The company posted a 4 per cent slip in its interim profits yesterday after its core pump and valve businesses suffered the knock-on effects of low oil and metal prices.

Pre-tax, pre-exceptional profit fell to pounds 28.3m from pounds 29.5m despite a slight increase in turnover mostly due to improved performances from the firm's naval, general industrial and water divisions.

So far this year, Weir's most important strategic move has been the announcement of its biggest-ever acquisition, the pounds 195m purchase of Warman, an Australian business specialising in heavy-duty pumps for the minerals industry.

The takeover was cleared by the Secretary of State for Trade and Industry yesterday and Weir hopes the acquisition will be earnings enhancing before goodwill amortisation in its first full year of ownership.

The group also made a number of bolt-on acquisitions in the first half of 1999 for a total consideration of pounds 7.7m.

Chief executive Duncan Whyte is hoping to develop a complete pump manufacturing service operation for industries such as mining and utilities. But further acquisitions are seen as unlikely in the next six to nine months.

Analysts expect a stronger second-half performance from the company, with full-year profits of pounds 64m. That puts the shares on a forward multiple of 13, broadly in line with the firm's peer group.

A predator may could return but on fundamentals the shares - up 6.5p yesterday st 304p - are not worth chasing. Reduce.