Melrose beefs up order book

Judging by the first four months of 2012, it's set to be another good year for turnaround specialist Melrose. It's deep into a key investment phase and the benefits are already obvious. There's another slug of money earmarked for capital and restructuring projects, too, while a big money takeover, almost a year after Melrose began its doomed approach for Charter, is expected soon.

It may be the slowest time of year for Melrose, but revenue still grew 9 per cent, and orders ran 3 per cent ahead of that. Once again, the Brush electricity generator business and lifting gear unit Crosby did best. True, there's been no repeat of last year's big nuclear order in the Slovak Republic, so margins at the former are down, but revenue was up 10 per cent and customers hint at strong demand into 2013. And Marelli has taken record orders for its industrial generators and electric motors, too.

Meanwhile, a thriving onshore oil and gas industry is maintaining momentum at the lifting specialist Crosby, where revenue grew 23 per cent and order intake was up 17 per cent. It's tougher offshore as Bridon will testify, but a new factory opens in November and 16 per cent growth in order intake for its high-spec rope is promising.

UBS says…

Buy. Increasing our price target to 450p reflects our view that Melrose has generated some of the best organic growth in the sector during the first quarter and is likely to continue to do so. Existing assets also offer greater visibility on earnings given their order book driven nature, and we specifically make decent increases to our valuations of Marelli, Crosby and Bridon. We see further upside to our price target if high growth in Brush and Bridon in particular comes through and if management can deliver on its target of 16-17 per cent group margins. Melrose is still a core buy for us.

Panmure Gordon says...

Hold. Following some mix adjustments, our estimates remain broadly unchanged as momentum in Melrose's lifting division offset the second-half dependence in energy and some considerable currency headwinds. The shares trade at higher levels due to a 3.5 per cent dividend yield and in anticipation over its next £1bn-plus acquisition, which could close within the next two months. Pricing in the benefits of the latter could add 60p-70p to our target price of 385p, reflecting a lesser valuation penalty concerning its pension obligations rather than any change to 2013 estimates. We forecast adjusted EPS of 31.7p in 2012, rising to 35.4p the year after.