Melrose gets engine arm firing

Melrose Industries (MRO) remains “nicely on track” to deliver on the ambitious target set last year to double profits twice between 2022-2025, according to chief executive Peter Dilnot.

The first half of this mission has been achieved, with the company growing adjusted operating profit to £390mn in 2023, from £147mn a year earlier. This improvement was largely driven by its engines business, where the operating margin jumped to 26 per cent, from 15.7 per cent year on year. 

This was partly due to higher volumes, with the civil engines aftermarket increasing by 40 per cent as engine flying hours picked up. The scope of work done during engine shop visits has broadened and there was also "positive pricing" momentum. But Dilnot argued that business improvements have played their part, such as the rationalisation of sites from 12 to nine. 

Performance at its structures arm also impressed, with the operating margin jumping to 5.1 per cent, up from 1.3 per cent a year earlier. 

And although the industry continues to grapple with supply chain strains, demand remains healthy, leading the company to lift adjusted profit guidance for 2024 by 6 per cent.

The shares slipped by 2 per cent, but given a 73 per cent gain over the previous 12 months some profit-taking was understandable. And a share price of 22 times forecast earnings is well above its five-year average. 

In this instance, though, historic valuations aren’t very useful given the major changes that have taken place, such as the Dowlais (DWL) spin-off. Management remains confident the improvement story has further to run, and with the bulk of a £500mn buyback announced last year due to complete by September, we think Melrose’s prospects remain bright. Buy.

Last IC View: Buy, 534p, 7 Sep 2023