Why is Bodycote undergoing various restructuring activities?

  • November 30, 2020 02:22 PM GMT
  • Kunal Sawhney
    CEO Kunal Sawhney
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    Kunal Sawhney is founder & CEO at Kalkine and is a richly experienced and accomplished financial professional with a wealth of knowledge in the Australian Equities Market. Kunal obtained a Master of Business Administration degree from University of T...

Why is Bodycote undergoing various restructuring activities?

Summary

  • Bodycote Plc has reported a revenue contraction of 18.0% for the ten-months period ended on 31 October 2020.
  • The Company has witnessed a significant restructuring activity in its AGI business segment.
  • The Company has announced the payment of an interim dividend for FY20 of 6.0 pence to be paid on 12 February 2021.

Bodycote Plc (LON: BOY) is the LSE listed industrial stock. Based on 1-year performance, shares of BOY have generated a return of -16.08%. Shares of BOY were down by close to 4.29% from the last closing price (as on 30 November 2020, before the market close at 08:05 AM GMT).

Bodycote Plc is the FTSE 250 listed Company, which is the the world's leading provider of heat treatment and specialist thermal processing services. It provides manufacturing process for market sectors, including aerospace and defence, automotive, power generation, oil & gas, construction, medical and transportation. The Company is the leading provider of thermal processing services in the world, having its operations in more than 180 locations in all the major manufacturing regions of the world, from California to Japan and from Mexico to Finland. 

Thermal Processing Industry Overview

The global market for heat treatment is estimated to be above £20 billion per annum, of which less than 20% is consumed by the sub-contractors, with the balance getting processed in manufacturers’ in-house capacity. The industry further enhances in-use characteristics, particularly in severe environments such as in aircraft engines and in sub-sea oil & gas applications. Hot isostatic pressing uses very high pressures in addition to a high temperature to achieve engineering outcomes that are impossible by other methods.

FY20 Trading Update (the four-month period from 1 July to 31 October 2020) as on 26 November 2020.

The Company has provided a trading update for the four-months period from 01 July 2020 to 31 October 2020. The Company has reported top-line performance for various business divisions during the four-months period.

  • The Group has reported a 20% contraction in revenue for the four-months period to £193.6 million demonstrating a slight recovery from the levels of 28% decline experienced in the second quarter due to adverse impact of Covid-19 pandemic. The Company has reported a drop of 18% in revenue for the ten-months period to £500.3 million.
  • The revenue in the ADE business went down by 33% (excluding the £10.3 million revenue contribution from the Ellison acquisition), while revenues in the AGI division were down by almost 15%.
  • The revenue for the civil aerospace business segment has declined the most, with like-for-like revenues went down by 50% due to the adverse impact of the downturn in civil aerospace that has affected the business since May 2020. The revenue of Energy business segment has seen a significant fall of 18% due to the weak performance of onshore US oil & gas business, which is dependent on the fortunes of the Permian Basin. The falling oil prices have reduced activity in this area among the customers. 
  • Car and light truck business segment was also impacted, and its revenue got declined by 11%, which represents a very significant recovery from the levels of more than 50% decline in the second quarter. The recovery was most substantial in North America, where inventory levels were also lowest following the production shutdowns seen in the second quarter. General industrial revenue was 13% lower because of the negative impact of destocking.
  • Emerging markets segment was dominated by automotive and general industrial revenues, returned to growth, increasing 2%, with a 20% increase in the revenues in China more than offsetting continued weakness across Eastern Europe.
  • The revenues for Specialist Technologies' has declined 21% during the four-months period, excluding the contribution from Ellison. Each of the Specialist Technologies in the AGI business registered revenue growth in the period and, as expected, Specialist Technologies continued to outperform the background market.

With regards to its financial position, the net debt has shown significant rise to £46.6 million as of 31 October 2020 when it is compared with £23.6 million as of 30 June 2020 due to  £25.1 million payment of the deferred 2019 dividend in September 2020 and £4.0 million of expenditure associated with the restructuring programme in the period. As a part of restructuring programme of AGI business, Bodycote's headcount has reduced to 4,813 FTEs as of 31 October 2020 when it is compared with the proforma FTEs of 5,764 at the beginning of the year. The Company has announced the payment of an interim dividend for 2020 of 6.0 pence to be paid on 12 February 2021.

H1 FY20 results (ended 30 September 2020) as reported on 26 November 2020

(Source: Company result)

  • The Company has reported a revenue decline of 16.3% to £306.7 million during H1 FY20 ended on 30 June 2020 from £366.5 million for H1 FY19 due to impact of a temporary shutdown at the customer’s location.
  • The headline operating profit of the Company was £37.8 million during H1 FY20, and it has reduced from the levels of H1 FY19 (£66.9 million).
  • Regarding the financial position, the Company reduced its net debt to £23.6 million, reflecting excellent cash generation capability. The Company has generated £69.7 million of free cash flow during H1 FY20 while it was £44.6 million in H1 FY19.
  • The Company has incurred exceptional restructuring cost of £32.1 million in H1 FY20 including the provision of £20.1 million, most of which will be paid in the second half of the year.
  • Return on sales has declined from 18.3% in H1 FY19 to 12.3% in H1 FY20.
  • The restructuring activity encapsulates closure of eighteen plants including thirteen in Europe, four plants in the USA and one General Industrial plant in Eastern Europe.
  • Three new greenfield facilities are all set to open in H2 FY20.

 

Share Price Performance Analysis of Bodycote Plc

(Source: Refinitiv, chart created by Kalkine group)

Shares of Bodycote Plcwere trading at GBX 692.00 and were down by close to 4.29% against the previous closing price as on 30 November 2020, (before the market close at 08:05 AM GMT).BOY's 52-week High and Low were GBX 975.00 and GBX 378.40, respectively. Bodycote Plc had a market capitalization of around £1.39 billion.

Business Outlook

The Company is expecting its civil aerospace market to remain at lower levels for the next 18 months. The AGI business segment has seen good recovery due to benefit from the step-change improvement in the quality of this business.The Company is consolidating its ADE business segment with significant expansion having itskey focus on the restructuring activity. The Company is also taking necessary actions to improve the business in the short-termwhile protecting itscapability to take advantage of the upturn. 

 


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