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Melrose plays waiting game

RESULTS: Engineering turnaround specialist Melrose is going great guns on its Elster acquisition, but the next big deal is proving as elusive as ever.
August 29, 2014

Melrose Industries (MRO) certainly seems to have the golden touch. It turned a handsome profit on its turnaround and subsequent sale of struggling engineering group FKI. That helped fund an almost £600m return of capital to shareholders during the year. Now it looks as though Melrose has found another gem in German utility-metering business Elster, which it snapped up in 2012.

IC TIP: Hold at 276p

Elster's operating profit rose 10 per cent in the first half, as the rigorous cost cutting for which Melrose is famous drove a 290 basis point increase in the operating margin. Elster's profitability has now improved by nearly 50 per cent since Melrose brought it into the fold, and management says the deal is on track to become the company's most successful to date. With most of the restructuring done, the focus now is on growing the business. A decent uptick in first-half orders suggests it's heading in the right direction.

The remaining chunks of FKI - Brush and Bridon - are finding life a little tougher, as the mining downturn has hit demand for their generators and fibre ropes. Operating profits sank 1 per cent and 25 per cent respectively. But Melrose says that enquiries and orders are now beginning to pick up.

As ever with Melrose, the crucial question remains: when's the next deal? Management tells us they are on the look out for opportunities, but - reading between the lines - nothing is imminent. The main sticking point is valuation. Management says the run-up in equity-market valuations has made it tough to find businesses at the right price. Their plan is simply to be patient and pounce when the moment finally comes.

Broker Investec expects adjusted earnings per share of 15.9p this year (from 16.4p in 2013), 7.3p of which was accrued in the first half. EPS should rise to 17.2p in 2015.

MELROSE INDUSTRIES (MRO)

ORD PRICE:276pMARKET VALUE:£3.0bn
TOUCH:275-276p12-MONTH HIGH:382pLOW: 247p
DIVIDEND YIELD:2.8%PE RATIO:27
NET ASSET VALUE:139p*NET DEBT:50%

Half-year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2013875643.62.75
2014781704.52.80
% change-11+9+25+2

Ex-div: 17 Sep

Payment: 16 Oct

*Includes intangible assets of £2.5bn, or 256p a share