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Bodycote downgraded by UBS on fears over prolonged auto and industrials weakness

The aero and auto engineer could continue to be impacted by weakness in the auto and industrials sector, according to UBS analysts
Bodycote downgraded by UBS on fears over prolonged auto and industrials weakness
Aerospace and energy account for some 40% of Bodycote's revenues

Bodycote PLC (LON:BOY) has had its target price cut and been downgraded to ‘neutral’ from a ‘buy’ rating by UBS after the Swiss bank said it feared the engineer would continue to be impacted by weakness in the auto and industrials sector.

Market expectations for Bodycote's 2018 growth have been stable, thanks to a strong pick-up in aerospace and defence, which delivered 13-14% growth between July and October – more than offsetting emerging weakness in industrials and energy.

READ: Bodycote and IMI downgraded by Liberum as broker forecasts “sharp correction” in Capital Goods sector

“We are concerned about prolonged weakness in industrial gas turbines (IGT) and a 2019 slowdown in the North American truck market and sUBSea investments,” UBS analysts wrote in a note to clients, adding that they had cut their growth and margin estimates for the non-aero businesses, and now model 1.0-1.8% organic growth in 2019-2020 versus 2.5-3.0% previously.

Autos and general industrials account for 60% of Bodycote’s revenues.

UBS expects Bodycote to see a strong pick-up in aero engine volumes in 2019 and 2020, but see growth on the Rolls-Royce engine starting to slow from 2020.

“At the 10- months update, management flagged a deteriorating outlook for IGT and a lIMIted pick-up in orders for subsea. The UBS Truck Barometer – Oct 2018 shows the backlog at record highs, but net orders in North America have declined for two consecutive months, with a higher level of cancellations. We see a risk of a negative surprise on increasing cancellations in the fourth quarter of 18 and 2019,” UBS’ analysts added.

The bank cut is 12-month price target for the engineering group to 814p from 1,000p.

Shares in Bodycote were 5.4% down in 692.0p in early afternoon trade.

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