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Melrose - buyback announced

Melrose has announced a £500m share buyback programme, to be carried out between 9 June 2022 and 31 Oct...

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Melrose has announced a £500m share buyback programme, to be carried out between 9 June 2022 and 31 October 2022.

CEO Simon Peckham said, ''Having agreed the sale of Ergotron, we are now in a position to again distribute capital to our shareholders and have chosen the quickest way to start to achieve that goal. We will continue to keep under review the appropriate capital structure of Melrose as we position for continuing success.''

Shares were up 8.6% following the announcement

View the latest Melrose share price and how to deal

Our View

Melrose supplies components to the aerospace and automotive industries. Both industries were upended by the pandemic, and now there's new pressure from supply chains and cost inflation. All-told, it's tough out there.

Automotive, the group's largest division, has benefitted from cost saving efforts which helped full year underlying profits rise. But supply chain issues and the semiconductor shortage kept demand from making a full recovery. Management's still targeting operating margins over 10% this year, but cost inflation has the potential to take a bite out of that forecast.

In Aerospace last year's lacklustre recovery in the travel sector weighed on results, but once again restructuring initiatives meant operating profits improved. The outlook here is brightening, but the industry's still up against plenty of headwinds--not least of which is a potential recession. To the group's credit, some disruption will be offset by exposure to the more resilient defence sector. Melrose is working to maximise profits on this side of the business, closing down parts of the US business and exiting £140m worth of low-margin contracts.

The sale of Nortek and Brush, offered up £2.9bn, the bulk of which was used to pay down debt and reduce pension obligations. We see that as a smart move, as the new nimbler organisation will have more flexibility to cope with challenges ahead. Shareholders also got an extra 15p per share dividend, and a newly minted £500m buyback is the latest kick-back as the deal progresses.

It appears Melrose is inching back toward its usual shareholder return policy, a move that's been applauded by the market. But with so many dark clouds still looming, we expect management to move forward cautiously.

The risk of near-term volatility is higher than the market is expecting. With a PE ratio above the long-term value, hopes are high for Melrose, but with so many industry-wide headwinds out of its control it may be a challenge to live up to the hype.

Melrose key facts

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.

Trading Update (5 May 2022)

Melrose is trading in-line with full year expectations. Aerospace like-for-like (LFL) sales are up 6%, while Automotive and Powder Metallurgy are being held back by supply chain pressure. Combined LFLs are down 4%.

Performance is expected to be weighted to the second half - but the group said it's ''confident'' it will be able to offset higher costs.

Full Year Results (3 March 2022)

Full year results were ahead of expectations with underlying revenue of £7.5bn, up 2% when adjusted for currency changes. The benefits from the group's restructuring efforts helped underlying operating profits more than triple to £375m. This did not include £826m in restructuring costs, amortization charges and acquisition and disposal expenses.

Melrose will pay a final dividend of 1p per share bringing the total to 1.75p for the year.

In light of the crisis in Ukraine, the board has decided to push back plans to return remaining proceeds from the sale of the Brush and Nortek businesses.

Aerospace makes engine structures and electrical wiring systems for aircraft. Sales in the second half rose 18%, but pandemic-related weakness earlier in the year meant full-year revenue in Aerospace declined 9.3% to £2.5bn. Operating profits improved from £14m to £112m, reflecting the benefits of restructuring projects underway.

Automotive specialises in drive systems. Revenue was broadly flat at £3.7bn, held back by supply chain disruption, semiconductor shortages and pandemic-related headwinds. Cost control and supply chain efficiency helped operating profits more than doubled to £172m.

Powder Metallurgy, which makes metal powders and parts for automotive and industrial customers, saw revenue increase from £905m to £975m. This was driven by a recovery at the start of the year, but erratic demand patterns due to the semiconductor shortage thereafter meant sales remained below pre-pandemic levels. Operating profits increased from £39m to £91m, reflecting improved demand, cost management and the benefits of restructuring efforts.

Other Industrial sold its Brush and Nortek Control businesses, leaving behind ergonomic goods manufacturer Ergotron and hydrogen storage business GKN Hydrogen. Revenue in Other Industrial was 7.4% higher at £233m. Operating profits increased by £1m to £51m.

Free cash flow was £125m, including the cost of restructuring. This was down from £456m last year because of fewer asset sales. Net debt improved from £2.8bn last year to £950m this year, helped by disposal proceeds which allowed the group to pay down debt related to the GKN acquisition faster than expected.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 8th June 2022