Melrose saw its full-year underlying revenue rise by £928m to £8.2bn, driven by growth in both the Aerospace and Dowlais segments which rose 16.3% and 10.9% respectively.
Total underlying operating profit for the group rose from £317m to £480m.
Net debt increased from £950m to £1.1bn, as dividends and buybacks totalling £581m more than offset net cash inflows from acquisition and disposal activities. Free cash flow fell from an inflow of £125m to an outflow of £8m.
The group stated its confidence that its Aerospace division will "significantly exceed expectations in 2023 and beyond". In the Dowlais segment, volume growth is expected to be around 3% for 2023.
The proposed Demerger, which would see the Dowlais segment spun out, will be voted on by shareholders on 30 March 2023.
A second interim dividend of 1.5p per share will be paid on 18 April. This will replace the final dividend and bring 2022 dividends up to a total of 2.325p per share - a 33% increase on last year.
The shares rose 1.1% following the announcement.
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Our view
Melrose specialises in buying, improving, and selling on ailing manufacturing businesses. It's Aerospace division performed extremely well last year, seeing sales jet up by double-digits. The automotive segment's also seen significant growth, helping to drive revenues forward.
At the end of March, Melrose shareholders will vote on whether the proposed spin-off of Dowlais, which includes the Automotive, Powder Metallurgy and Hydrogen businesses, will go ahead. And if approved, Melrose will look to complete the demerger before the end of April.
Should the spin-off take place, the two businesses would become separate, publicly listed companies. Melrose will retain ownership of its Aerospace business, and shareholders will end up with shares in both companies.
On paper this sounds like a solid plan. Management's said the new automotive business will maintain a similar shareholder return programme to that of the existing business. That means they'll move forward with targeted acquisitions, improve them, with the aim of selling them on for a profit - which is shared out among investors.
But it won't be quite so simple. Economic doom and gloom is hanging heavy over the entire market. Neither automotive nor aerospace is a particularly great place to hide when the economy's in a down cycle. Plus neither has recovered fully from the pandemic, and free cash flow is in the red - so it could be some time before the group can make meaningful purchases without overloading on debt.
There's also a chance Melrose is gearing up to sell Aerospace to a foreign buyer. The group promised to keep the defence-heavy business on British soil for five years when it was purchased - but the clock runs out this year. If that's where this story is heading, Melrose could find itself at the centre of a regulatory battle to keep the business from changing hands.
Melrose is trading at 15.4 times expected earnings and above the long-term average, reflecting investor confidence in management's ability to pull this off. Given the marked recovery in aerospace and opportunities in automotive, this may well be the case. But considering the execution risk ahead, investors should be prepared for volatility.
Melrose key facts
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