Body­cote boom time raises the fear of in­evitable bust

Heat­ing en­gi­neer’s share price hits record highs, but for how long?

Shares - - BIG NEWS -

An oper­a­tionally geared busi­ness model and lim­ited vis­i­bil­ity on fu­ture work could leave

Body­cote (BOY) short of ex­pec­ta­tions if a cycli­cal down­turn emerges.

Fore­casts for the heat­ing and ther­mal sys­tems en­gi­neer have been up­graded at least twice this cal­en­dar year thanks to a ro­bust end mar­ket de­mand.

This led to the com­pany an­nounc­ing a 25p per share spe­cial div­i­dend along­side forecast-bust­ing 2017 re­sults. Body­cote raised 2018 full year guid­ance again at the end of May.

That has en­cour­aged in­vestors to chase the share price to all-time highs of £10.17, putting the stock’s price-to-earn­ings mul­ti­ple at 20.4,

nearly a dou­ble-digit pre­mium to sec­tor peers.

While there is presently lit­tle hint that work is dry­ing up – quite the op­po­site – Body­cote man­age­ment ad­mit that the busi­ness ‘has lim­ited for­ward vis­i­bil­ity.’ This sug­gests there will be lit­tle warn­ing if a fall in de­mand does slam the brakes on new con­tracts.

Op­er­a­tional gear­ing is when a busi­ness has pre­dom­i­nantly fixed costs. This is a dou­ble edged sword that makes un­ex­pected busi­ness wins more profitable when de­mand for prod­ucts or ser­vices are high. Equally, it is harder to lower op­er­at­ing ex­penses when times get tougher, mag­ni­fy­ing the neg­a­tive ef­fects on prof­itabil­ity. (SF)

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