Melrose’s full-year underlying revenue rose 13.4% to £3.4bn, reflecting double-digit growth in both its Engines and Structures divisions.
Underlying operating profits grew 165% to £390mn. This was largely driven by the Engines division, which is benefiting from a recovery in global flying hours and improved margins.
Underlying free cash flow improved from an outflow of £35mn to an inflow of £113mn. After adjusting for items related to the Dowlais demerger, net debt grew from £487mn to £572mn.
In 2024, revenue is expected to come in between £3.6-3.75bn. Underlying operating profits are expected to land in the £550-570mn range, before accounting for around £30mn worth of corporate costs.
A final dividend of 3.5p per share has been announced, taking the full-year total to 5.0p. £93mn worth of share buybacks were completed in 2023.
The shares fell 3.6% following the announcement.
Our view
Melrose is a pure-play, high-quality aerospace business. The group's benefitting from strong growth drivers, which helped its Engines and Structures divisions grow revenue at double-digit rates last year.
While the aviation sector can be volatile, we think the current outlook for long-term growth is solid. Melrose's exposure to military as well as commercial customers provides a welcome layer of diversification.
Airlines are also looking to upgrade their ageing fleets after several years of Covid-related underinvestment. That's resulted in record order backlogs to supply components for more than 14,000 Boeing and Airbus aircraft, stretching all the way out to 2030 and beyond. We see the potential for mid-to-high single-digit revenue growth over the next few years.
The group's Engines segment has multiple Risk and Revenue Sharing Partnerships (RRSPs) with engine makers - 17 out of 19 of which were in the cash-generation phase. The RRSPs require Melrose to contribute an agreed percentage of the total annual engine costs, and in exchange, it receives the same percentage of total annual engine revenue. Considering the long lifetime of an engine model (typically 30+ years), it means Melrose can continue to benefit from ongoing cash flows for decades after engine delivery.
Profitability in the Engines division continues to impress, with operating margins sitting north of 25%. Further improvements are expected, which is fuelling management expectations that total group margins can be ramped up to at least 17% in 2025. While this sounds attractive, it relies on trimming fixed costs, improving productivity, and resolving issues with unprofitable contracts. By no means a straightforward set of tasks.
There are other clouds on the horizon too. While there's been a steady uptick in air travel over the past couple years, the potential for a recession hasn’t disappeared. Historically, aerospace has not been a particularly great place to hide when the economy enters a down cycle. And while supply chain disruptions have moderated, they're likely to remain a thorn in the group’s side.
Since the demerger of Dowlais, the historic multiples are no longer reflective of Melrose's current operations. The new, streamlined Melrose trades at 22.7 times expected earnings, which is towards the high end when compared to peers. With an improving market backdrop there may still be room for upside. But bear in mind, there are still plenty of operational challenges for Melrose to navigate, so buckle up for some volatility over the short term.
Melrose key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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