Melrose takes off

On early evidence, splitting the aerospace part of the GKN business Melrose Industries (MRO) acquired for £8bn in 2018 from its automotive, powder metallurgy and hydrogen arms – now known as Dowlais (DWL) – has paid off.

When the deal was announced this time last year, the combined entity had a market cap of just £5.3bn. Melrose alone was worth more than that (£5.6bn) once the demerger went through in April and has continued to increase in value since as “we’re doing what we said we’d do” in terms of delivering improved profits, chief operating officer Peter Dilnot said.  

Melrose reported an adjusted operating profit of £175mn from its core aerospace arm – more than double the £67mn earned in the same period last year, although it declared a statutory pre-tax loss of £62mn once additional group costs related to the Dowlais business (and demerger) are factored in.

The improvement was due to a 20 per cent increase in revenue and a hike in its adjusted operating margin – to 10.7 per cent, a 5.8 percentage point increase.

The company had flagged last year that its engines arm would improve its fortunes as contracts matured and so it proved – 17 of its 19 long-term deals are now profitable as they enter the aftermarket phase, Dilnot said. The engine arm’s margin rose to 24.5 per cent, meaning it is on track to reach a target of 28 per cent by 2025 and 30 per cent beyond.

Full-year guidance was lifted by 8 per cent, leading the company to bring forward a £500mn share buyback programme, which will start next month.

The other significant news was that Melrose’s two remaining co-founders – executive vice-chair Chris Miller and chief executive Simon Peckham – will step down next March. This is understandable, given Melrose’s move away from its 'buy, improve, sell' model.

Dilnot, who will become chief executive, sees “a pathway for this business to be a FTSE 50 UK leader in global aerospace”.

House broker JPMorgan increased its earnings per share forecast by 10 per cent for this year and 8 per cent for next, accounting for the improved guidance and buybacks. The 30 per cent gain made since its split mean Melrose's shares now trade at 33 times this year’s forecast earnings, or 22 times next year’s. This is well ahead of a five-year average of 18 times but then again its prospects look much better. Buy.

Last IC view: Buy, 413p, 21 April 2023