Full year underlying revenues declined 19.2% to £9.4bn. That's due to pandemic-related disruption in the first half, and continued weakness in Aerospace through the end of the year.
Underlying profits fell 6.9% to £340m. However, including charges relating to the write-down in value of assets, and restructuring costs, that figure would have been a £338m loss.
The board proposed a final dividend of 0.75p per share and intends to reintroduce a "progressive dividend policy" in future periods.
The shares were broadly flat in early trading.
Melrose wasn't in peak condition before the pandemic.
Buying GKN involved taking on considerable debts, not to mention a sizeable pension deficit. While the Melrose management team made impressive early progress in improving margins, there hasn't been time to sell off the smaller Powder Metallurgy business and shore up the balance sheet.
Against that backdrop the near complete closure of Automotive and Powder Metallurgy, and reduction in activity in Aerospace was always going to stress the business.
So far the group's been able to boost its cash position by running down inventory and collecting extra cash from customers. That's actually seen it trim debt levels a little. But a long and sustained downturn in aerospace suggests lower profits in future years and will unfortunately lead to significant redundancies.
Redundancies mean upfront cash costs, and lower sales mean reduced cash inflows. With working capital improvements difficult to repeat indefinitely, we suspect the vast majority of available cash will be directed towards debt reduction for some years to come. In that case it will take years for the dividend to return to anything like the levels it once was.
There were some green-shoots in the group's full year results--particularly in Automotive and Powder Metallurgy. Pent-up demand coupled with limited product availability in the second half supported a rebound in sales. But even in a best-case scenario, those tailwinds will dissipate as demand evens out. The longer-term economic outlook is uncertain, and we can't rule out a downturn. That would be bad news for car sales, one of Melrose's key end markets, and will also make disposals of the Powder Metallurgy and smaller Nortek businesses more challenging.
More worrying is the pessimistic outlook for long-term demand in aerospace, the group's largest growth engine. Exposure to defence markets will provide some shelter for the division, but the outlook for commercial aerospace is pretty bleak. British Airways owner IAG reckons passenger demand won't return to 2019 levels until 2023 at the earliest. Fewer passengers mean fewer planes, and fewer planes means less demand for Melrose's products.
It's hard to overstate the hurdles ahead. However, the good news is managing industrial businesses through difficult market conditions is what the Melrose management team do best. They have done a good job so far, with significant cost saving already delivered. That provides some reassurance in the longer term.
Melrose key facts
- Price/Earnings ratio: 24.7
- 10 year average Price/Earnings ratio: 11.7
- Prospective dividend yield (next 12 months): 1.2%
All ratios are sourced from Refinitiv. 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.
Full Year Results
Revenue within Aerospace declined 27% to £2.8bn. However, high costs meant underlying operating profits fell faster than revenues. These came in at £14m, compared to £409m in 2019. Melrose incurred £110m of costs, including redundancy packages related to the pandemic. It also recognised a £133m non-cash charge, as the reduction in civil aerospace activity reduced the value of its assets. Including these costs and other underlying items, the division reported a £410m operating loss. The group said "no recovery has been seen in the civil aerospace market and this is not expected to change in 2021."
Full-year Automotive revenues fell 19% to £3.8bn, but recovered sharply in the second half. During the final three months of the year, sales were 8% ahead of 2019 levels. That was attributed to a combination of low global stock and pent-up demand, and isn't expected to continue with the same intensity. Underlying operating margins in the second half rose to 6.5%, but underlying operating profit of £82m was less than half 2019's levels.
The Powder Metallurgy business was hit hard by Covid restrictions, which saw revenue decline to £905m, from £1.1bn. Underlying operating profits fell from £117m to £39m. Margins made their way above 8% during the final three months of the year, contributing to a full-year operating profit margin of 4.3%.
Nortek revenues were flat at £1.2bn, with operating profits of £188m up 7.4%. Management noted that the sale process for the division has begun, but there's no guarantee it will be completed.
Free cash flow during the year rose to £456m from £290m, reflecting management's focus on cash preservation when the pandemic struck. Net debt decreased by 13% to £2.8bn.
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