Broker snap: JPMorgan downgrades Bodycote on volume concerns

29th May 2013 09:27

JPMorgan Cazenove has cut its recommendation for FTSE 250-listed thermal processing group Bodycote from 'neutral' to 'underweight', saying that the group's outperformance will likely reverse on the lack of volume growth.The company, which provides a range of services including heat treatment, metal joining and material coatings, has re-rated strongly over the past 12 months with the shares up 48%, moving its price-to-earnings multiple from 9.0 to 14.However, JPMorgan believes that this has been "largely justified" given the improvements achieved by Bodycote's management."We believe management has improved the business, primarily through a more pro-active approach to costs but also in terms of customer contracting, a targeted approach to winning new business and a greater emphasis on new treatment techniques."Nevertheless, the broker reckons that the shares will now underperform due to mid near-term conditions across the group's key end markets and geographical exposures which will limit volume growth."The group generates c.65% of revenues in Western Europe. Automotive and general industrial markets represent over 60% of group revenues. Given this combination, we believe a significant percentage of the group's markets are likely to remain challenging and we do not forecast underlying volume growth."The target price for the shares remains unchanged at 495p.The stock was down 2.58% at 548.5p by 09:58 on Wednesday.