Melrose Industries plc (MRO) ORD 0.1p

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Melrose reported full-year underlying revenue growth of 8% to £3.6bn (£3.5bn expected). The Engines division grew at the fastest pace, up 15%, driven by strong aftermarket demand. Airframes (renamed from Structures) revenue grew 3%.

Underlying operating profit rose 23% to £0.6bn (£0.6bn expected), driven by top line growth and improving margins.

Free cash flow improved from an outflow of £0.1bn to an inflow of £0.1bn. Net debt rose by £0.1bn to £1.4bn.

In 2026, revenue is expected to land between £3.75-3.95bn. Underlying operating profits are expected to be in the £0.70-0.75bn range, which was below market expectations.

A final dividend of 4.8p per share was announced, taking the full-year total to 7.2p, up 20%. A new £175mn share buyback programme was also announced.

The shares fell 13.5% in early trading.

Our view

Melrose delivered impressive growth in 2025, with its Engines segment remaining the main driver of performance, driven by strong aftermarket demand. But profit guidance for the year ahead wasn’t as strong as markets had expected, which saw the shares move lower on the day.

Melrose is a pure-play, aerospace business. Its Airframes division (formerly Structures), which deals with building the body and wings of planes, has seen performance improve recently thanks to growing demand on the Defence side. But the Civil Aerospace side remains a drag on performance, impacted by lower volumes and manufacturing challenges.

Truth be told, we view Airframes as one of the least attractive areas of the aerospace sector. It tends to have generally weak pricing power, and the supply chains involved in building these structures can make for a logistical nightmare, often leading to production delays.

We wouldn’t be opposed to Melrose offloading this part of the business, but there doesn’t seem to be too many potential buyers knocking about at this stage. In the meantime, it’s likely to keep weighing on group growth.

The Engines business is the better asset, where it builds key components for aircraft engines. It has Risk and Revenue Sharing Partnerships (RRSPs) with engine makers, which cover around 70% of all global flights. 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. Operating margins are moving higher, and further improvements are expected. 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.

Some issues are also outside of Melrose’s control. Unfavourable exchange rates were blamed for a downgrade to full-year guidance back in August of last year. And with supply chain issues likely to remain a challenge for the industry, we can’t rule out further setbacks in the future.

Melrose looks attractive based on traditional valuation metrics, like the price-to-earnings ratio. But remember, ‘cash is king’ and Melrose has only just begun to produce positive free cash flows, following three years of outflows. Until it develops a track record of delivering, we think other names in the sector look better placed to benefit from industry-wide tailwinds.

Environmental, social and governance (ESG) risk

The aerospace and defence sector is high-risk in terms of ESG. Product governance and business ethics are key risk drivers. Carbon emissions from products and services, data privacy and security and labour relations are also contributors to ESG risk.

According to Sustainalytics, Melrose’s management of ESG risk is strong.

It has board-level oversight of ESG issues and a very strong environmental policy. A part of executive remuneration is explicitly linked to sustainability performance targets, and there is a robust whistleblower policy in place. However, business is cyclical, depending highly on economic changes, which can lead to periodic layoffs.

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 LSEG. 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.

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