22nd Jan 2024 12:55
(Alliance News) - Bodycote PLC shares are undervalued, according to analysts, who were responding to Bodycote's new share buyback announcement and despite the Cheshire, England-based firm cancelling its acquisition of Stack Metallurgical Group.
Shares in Bodycote were up 4.7% at 624.75 pence each in London on Monday morning, the best FTSE 250 performer.
The supplier of heat treatments and specialist thermal processing services said it will launch the GBP60 million buyback programme in March. More details on the repurchase plan will be revealed in Bodycote's annual results on March 15.
Bodycote said the buyback comes as a result of "lower than anticipated acquisition spend". The company said a deal to acquire Stack Metallurgical will not be completed. This is due "to a failure to satisfy all closing conditions to the agreement".
The firm had announced the deal to acquire SMG in October, at the same time it said it was buying Indiana-based specialist technology company Lake City. Those deals would have amounted to USD145 million in total.
Jefferies said the group's balance sheet will be stronger than anticipated as a result of the cancelled acquisition and that it does not expect much change to consensus earnings forecasts after this announcement.
"While the decision to not complete the SMG acquisition throws up a few questions and calculating the impact on profits/earnings is not straightforward, there is nothing untoward here, and the decision to undertake a GBP60 million buyback is a sensible one that should be taken well," said Jefferies analysts.
"The group is in good shape operationally and financially (the balance sheet is in very good nick) and the LCHT acquisition is being done at an attractive multiple, in our view."
On Friday, Bodycote completed the acquisition of Lake City for a USD66.5 million consideration. Following expected tax benefits of USD7.5 million, the company said the net economic price amounted to USD59.0 million.
"It is now apparent that SMG was the larger of the two businesses, and while it may have had much more 'improvement potential', the business had materially lower margins than LCHT, and it appeared that Bodycote was paying a higher near-term multiple for the business," said Jefferies analysts.
Jefferies rates Bodycote at 'buy', setting a target price of 900.00p.
Peel Hunt also rates Bodycote at 'buy', setting a target price of 1,000p. It said Bodycote is trading at a 52-week low, which it said represents a "tremendous opportunity" on an estimated 12.5 times price-to-earnings ratio for 2024.
"The key pluses for us here are developing further exposure into key growth markets, such as medical, underpinned by key technologies, including HIP. The buyback highlights the significance and focus around capital allocation. There is no update on current trading, which means it should be in line with expectations," said Peel Hunt analyst Harry Philips.
By Greg Rosenvinge, Alliance News senior reporter
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