Industrial turnaround specialist Melrose (MRO) follows a 'buy, improve, sell' strategy. The idea is to purchase underperforming manufacturing businesses, invest in them to boost productivity and then dispose of them for a profit, typically three to five years later. It acquired engineering company GKN for £8.1bn in 2018, inheriting £629m-worth of lossmaking contracts. Operational efficiencies and price increases saw these losses drop 11 per cent last year and this progress is reflected in Melrose’s full-year numbers. The group swung to a statutory pre-tax profit in 2019, while adjusted operating profit increased by over a third to £1.1bn, exceeding analysts’ expectations.
Despite the grounding of Boeing’s 737 Max jet, GKN aerospace sales rose 7 per cent and adjusted operating profit was up a quarter to £409m on the back of a 1.4 percentage point margin expansion. The North American business, which accounts for almost two-thirds of aerospace revenue, moved from a £43m loss in 2017 to a “small” profit last year. While the order backlog suggests continuing opportunities in civil aerospace, defence could become a more significant part of the sales mix as rising global military spending underpins demand.
Automotive and powder metallurgy sales were hit by the global downturn in the automotive market, with sales down by 6 per cent and 10 per cent, respectively. Despite the challenging backdrop, good cost control lifted the automotive margin by 0.3 percentage points to 7.7 per cent, closer to its 10 per cent target. The group has 11 automotive factories in China and so expects “some sort of hit” this year from the coronavirus outbreak. Around 10 per cent of manufacturing is done in China, of which 5 per cent remains in the country.
Free cash flow from continuing operations jumped by almost three-quarters to £290m during the year. Meanwhile, including £582m in lease liabilities, net debt dropped to £3.3bn - equivalent to 2.25 times adjusted cash profits (Ebitda).
House broker Investec expects adjusted pre-tax profit of £914m and EPS of 14.5p in 2020, rising to £1bn and 16.5p in 2021.
| MELROSE (MRO) | |||||
| ORD PRICE: | 174p | MARKET VALUE: | £9.8bn | ||
| TOUCH: | 1174.3-174.4p | 12-MONTH HIGH: | 255p | LOW: | 156p |
| DIVIDEND YIELD: | 2.9% | PE RATIO: | na | ||
| NET ASSET VALUE: | 146p* | NET DEBT: | 51%** | ||
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) | |
| 2015 | 0.26 | -30.7 | -0.3 | 1.0 | |
| 2016 | 0.89 | -69.3 | -2.6 | 2.2 | |
| 2017 | 2.09 | -27.6 | -1.2 | 4.2 | |
| 2018*** | 8.15 | -542 | -12 | 4.6 | |
| 2019 | 11.0 | 106 | 0.9 | 5.1 | |
| % change | +27 | - | - | +11 | |
| Ex Div: | 2-Apr | ||||
| Payment: | 20-May | ||||
| *Includes intangible assets of £9.8bn or 190p per share | |||||
| **Includes lease liabilies of £582m | |||||
| ***Restated | |||||
