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Melrose Industries plc (MRO) ORD GBP0.076190476

Sell:182.85p Buy:146.05p 0 Change: 2.90p (1.93%)
FTSE 100:1.55%
Market closed Prices as at close on 7 December 2021 Prices delayed by at least 15 minutes | Switch to live prices |
Change: 2.90p (1.93%)
Market closed Prices as at close on 7 December 2021 Prices delayed by at least 15 minutes | Switch to live prices |
Change: 2.90p (1.93%)
Market closed Prices as at close on 7 December 2021 Prices delayed by at least 15 minutes | Switch to live prices |
The selling price currently displayed is higher than the buying price. This can occur temporarily for a variety of reasons; shortly before the market opens, after the market closes or because of extraordinary price volatility during the trading day.

HL comment (5 October 2021)

Melrose has published a short trading update covering the period from July 1 to September 30.

The group said that it has seen a good recovery in Aerospace, with sales up 16% year-on-year. Restructuring in the divisions continues and is expected to pick up speed in the second half.

In Automotive and Power Metallurgy the group is experiencing significant disruption, caused by supply chain challenges across the industry. That is leading to a high level of cancellations from customers, as supply restrictions elsewhere in the supply chain disrupt production. Both divisions are nonetheless expected to achieve margins approximately twice what was delivered in 2020 - even if volumes remain at 2020 levels.

Despite the supply constraints, and investment in technology and restructuring, all businesses are delivering positive cash flow.

The board will review capital returns next March.

Melrose shares fell 1.6% in early trading.

Our View

Melrose supplies components to the aerospace and automotive industries. Both industries were upended by the pandemic and are only just starting to show signs of recovery.

At the half year Automotive, the group's largest division, benefited from cost saving efforts which helped underlying profits rise. Management expects to achieve its 10% margin target if sales return to 2019 levels in 2022. But that's a very big ''if''. Supply chain issues are causing disruption to customer production schedules and orders are being cancelled as a result. Still, at least cost saving efforts should mean margins are improving.

There's better news in aerospace, where an uptick in narrowbody build rate is expected to gain momentum through the end of the year. But air travel is unlikely to rebound fully until at least 2024. Fewer passengers mean fewer planes, and fewer planes mean less demand for Melrose's aircraft components. Weakness in commercial air travel will be a drag on overall performance for the next few years. To the group's credit, some disruption will be offset by exposure to the more resilient defence sector. Defence makes up 41% of the division's revenue.

Another piece of good news at the half year was the sale of Nortek and Brush, which offered a welcome relief for Melrose's balance sheet. The bulk of the £2.8bn proceeds are being 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. Moving forward management believes it will have the capacity to funnel even more cash to investors - but won't decide exactly what that means until next March and there are no guarantees.

The worst seems to be behind Melrose, but the coast isn't completely clear. While the group's progress in the wake of the pandemic has been encouraging, leaning heavily on automotive, a sector struggling against a multitude of headwinds, is risky. The market doesn't seem to share our concerns, with the group's valuation significantly higher than the ten-year average. That increases the risk of near-term volatility if things don't go to plan.

Melrose key facts

  • Price/Earnings ratio (next 12 months): 20.1
  • 10 year average Price/Earnings ratio: 11.8
  • Prospective dividend yield (next 12 months): 1.8%

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.

Half Year Results (02/09/21)

Melrose said trading has been better than expected. Half year underlying revenues rose 5.6% to £3.8bn, reflecting a strong performance in Automotive and Powder Metallurgy.

Underlying profits rose to £109m from a loss of £80m last year. However, including restructuring costs, those associated with acquisitions and disposals and amortisation charges, the group reported a loss of £151m.

In addition to a 0.75 pence interim dividend, Melrose will return an additional 15p per share to shareholders, following the sale of Nortek Air Management and Brush. Melrose said it has capacity for "a significant further capital return next year."

Revenue within Aerospace declined 33% to £1.2bn. Underlying operating profits fell from £54m to £41m, helped by significant cost saving efforts. The group's started to see demand pick up in narrowbody build rates, a trend that's expected to continue gathering pace through the end of the year and beyond.

Half-year Automotive revenues rose 34% to £1.7bn, reflecting a strong performance in Europe, Asia Pacific and China. Underlying operating margins were steady at 6.2%. Combined with the higher sales, that meant underlying operating profits rose to £121m from a £64m loss. The global semiconductor shortage is a headwind for the division, but if sales return to 2019 levels, the group expects hit its margin target of 10%.

Powder Metallurgy saw revenue rise 43% to £522m, broadly in-line with pre-pandemic levels. Underlying operating profits were £60m, up from a £3m loss last year and the group's making progress toward it's 14% margin target. Restructuring in the division is expected to be complete by the end of the year.

Revenue in Other Industrial, which now houses only Ergotron after the August agreement to sell Nortek control, was broadly flat at £109m. Underlying profits rose to £27m from £22m.

Melrose has reduced its pension funding deficit from £1bn to roughly £150m, ahead of schedule. This has halved the annual contribution to £30m.

Underlying free cash flow, which ignores restructuring and special pension payments, was £167m, up from £117m. Net debt, including the September capital return, fell from £2.8bn to £1bn, or 1.5 times cash profits.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.

Previous Melrose Industries plc updates

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