Melrose to “unlock” £400m from GKN

For chairman Justin Dowley, “these results show the initial fruits of the 'improve' stage of Melrose's ownership of GKN”, which the engineering company acquired via a hostile takeover in April 2018. GKN Aerospace saw sales rise by 7 per cent year on year, and the business is now the largest contributor to overall group profits. Days prior to the publication of Melrose’s half-year figures, we learnt that GKN Aerospace would reorganise itself from four divisions into one fully integrated entity – a move designed partly to improve operational performance, albeit one that means its headcount will reduce by around 1,000.

Meanwhile, both the GKN automotive and powder metallurgy businesses have been hit by the global downturn in the automotive industry – and Melrose warns that it expects this difficult backdrop to persist into the second half. Cost-control initiatives are under way, including the closure of a German automotive production facility.

Elsewhere, the group’s Nortek air and security business had a mixed six months. The air segment traded well, but the security and smart technology (SST) area has suffered due to US tariffs, the scheduled expiry of a big customer contract, and competitive market conditions. SST has opted to close its Chinese factory and move to contract manufacturing with a third-party supplier. It also continued to integrate IntelliVision, the video and AI analytics company that it bought last year, and expects to launch its new security platform in the next year.

Investors were, perhaps, most enthused by the news that Melrose has launched a working capital review across GKN and aims to “unlock” another £400m of cash. Management says this will mostly come from inventory management. For the period under review, the group achieved a net-debt-to-cash-profits ratio of 2.3, ahead of management's expectations.

Investec forecasts adjusted pre-tax profits of £862m and EPS of 13.4p for 2019, up from £677m and 12.8p in the prior year.