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Melrose holds on to its money

Shares hit by company's decision to preserve cash
Melrose holds on to its money
  • Disposals bring in £2.7bn
  • Net debt drops by £1.9bn to £950mn

Melrose Industries (MRO) has made its name buying and turning around engineering businesses, earning big returns for its shareholders in the process.

Its largest deal to date, the £8bn acquisition of GKN almost four years ago, was an uphill struggle from the start, given the opposition to the deal from unions and politicians who accused it of looking to strip the target of its assets.

The fact that GKN’s two main business lines are supplying an aerospace industry that has been battered by the pandemic and an automotive sector struggling to make enough cars due to chip shortages clearly haven’t helped.

Add to this the developing situation in Ukraine, which doesn’t affect the company directly, but causes more disruption for its car making customers, and the timing hasn’t been ideal.

Yet, while there are still questions in terms of the pace of recovery on revenue, chief operating officer Peter Dilnot said the company has focused “on the things we can control” and is confident of delivering its objective of generating a 12 per cent operating margin.

Its restructuring of the automotive business should complete this year and it is now in full swing in terms of reshaping the aerospace division, which involves exiting a group of lossmaking defence businesses in the US. This should conclude next year.

A £451mn operating loss last year includes a £452mn amortisation charge against acquired intangible assets and £269mn of restructuring costs. If these and other charges are discounted, its operating profit more than doubled to £375mn, the company said.

A less disputable improvement was made in its cash position, which benefited from disposals of businesses acquired during previous turnarounds. These brought in £2.7bn, meaning that even after returning £729mn to investors in September, net debt dropped by £1.9bn to £950m.

The company increased its dividend and had flagged to investors that it planned to return even more cash if conditions allowed but it has now put the brakes on this plan.

“We were lined up to do it and we can afford to do it; the issue is a macro one,” Dilnot said. “If things [in Ukraine] do escalate beyond where they are today it would seem, in retrospect, foolish to have re-levered our balance sheet.”

Investors were clearly disappointed, with the company’s shares plunging 8 per cent in early trading before pulling back.

They are currently trading at around 18 times broker Investec’s adjusted earnings per share forecast of 7.6p, in line with their five-year average. A recovery either in aviation or the automotive sectors is by no means guaranteed, but demand is strong in both markets and Melrose is in a better place to benefit once revenues recover. We maintain our buy stance.

Last IC View: Buy, 183p, 2 Sep 2021

MELROSE INDUSTRIES (MRO)  
ORD PRICE:136pMARKET VALUE:£6bn
TOUCH:136.1-136.3p12-MONTH HIGH:191pLOW: 130p
DIVIDEND YIELD:1.3%PE RATIO:na
NET ASSET VALUE:172p*NET DEBT:17%
Year to 31 DecTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20172.09-27.6-1.204.20
20188.15-542-11.84.60
201911.01060.95.10
2020 **7.13-679-11.70.75
20216.88-618-9.61.75
% change-4-9-+133
Ex-div:7 Apr   
Payment:20 May   
*Includes intangibles of £7.4bn, or 169p a share **Restated to remove discontinued operations