Unfortunately for engineering conglomerate Melrose (MRO), it is exposed to some of the sectors most battered by the Covid-19 pandemic – automotive, aerospace and industrials. The six months to 30 June saw the group’s revenue plunge by 27 per cent, with a steep decline in the second quarter thanks to the shuttering of its factories and a drop off in demand.
In the aerospace business – which supplies big names such as Airbus (FR:AIR), Boeing (US:BA) and Rolls-Royce (RR.) – sales dropped by almost a fifth in the first half. Amid a worsening outlook, they are expected to plummet by around 25-30 per cent for the full year. Aerospace sales accounted for a little over a third of Melrose’s total revenue last year.
Meanwhile, the automotive and powder metallurgy divisions took an even bigger hit, with sales declining by over a third in the first six months of the year. There have been some signs of a recovery, with trading in China now ahead of last year and summer revenue in the US forecasted to be only down 10 per cent from a year earlier. But the group has cautioned that this rally may not be sustained.
Melrose made an adjusted operating loss in the second quarter, although the easing of lockdown restrictions allowed it to recover to breakeven in June. As such, the group is guiding that it will make a “small” adjusted operating profit for the first half of the year. This compares to the £539m of profit it produced a year earlier.
Despite the hit to profitability, Melrose still generated £200m of adjusted free cash flow, which excludes the impact of restructuring and acquisitions. Net debt currently stands at £3.2bn and the group has secured a waiver for its lending covenant for the June and December testing dates that says net debt must be no more than 3.5 times cash profits (Ebitda). It has £1.1bn of headroom on its committed borrowing facilities and £300m of cash on hand. But there won’t be an interim dividend and in light of the new environment, the group will look to make around £100m of savings in 2021, warning that job losses are “inevitable”.
