Melrose Industries — Fundamentals remain positive

Melrose Industries (LSE: MRO)

Last close As at 03/01/2025

GBP5.55

1.60 (0.29%)

Market capitalisation

GBP7,145m

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Research: Industrials

Melrose Industries — Fundamentals remain positive

The aerospace sector outlook remains positive, with lengthy order books at the primes (Airbus and Boeing) and total passenger flying hours in 2024 on schedule to exceed post-pandemic levels, supporting a strong aftermarket. The former will assist margin recovery for Melrose Industries’ original equipment (OE) operations, while increased flying hours are already generating strong growth and margin in the aftermarket business. Hence, our adjustment to estimates for external factors, such as FX movements, should not detract investors from focusing on the underlying positive dynamics of the business.

David Larkam

Written by

David Larkam

Analyst, Industrials

Industrials

Melrose Industries

Fundamentals remain positive

Year-end update

Aerospace and defence

2 January 2025

Price

553p

Market cap

£7.1bn

Net debt (£m) at 30 June 2024

976

Shares in issue

1,287m

Free float

99%

Code

MRO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.0)

20.7

(2.4)

Rel (local)

(3.6)

22.3

(7.6)

52-week high/low

677p

417p

Business description

Melrose Industries is a focused aerospace group with activities in engine components and structures, operating in both metallic and composite materials. The group has significant risk reward sharing partnership investments on multiple engine programmes.

Next events

Preliminary results

6 March

Analyst

David Larkam

+44 (0)20 3077 5700

Melrose Industries is a research client of Edison Investment Research Limited

The aerospace sector outlook remains positive, with lengthy order books at the primes (Airbus and Boeing) and total passenger flying hours in 2024 on schedule to exceed post-pandemic levels, supporting a strong aftermarket. The former will assist margin recovery for Melrose Industries’ original equipment (OE) operations, while increased flying hours are already generating strong growth and margin in the aftermarket business. Hence, our adjustment to estimates for external factors, such as FX movements, should not detract investors from focusing on the underlying positive dynamics of the business.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/22

2,954

89

4.1

2.3

135.0

0.4

12/23

3,350

325

19.5

5.0

28.4

0.9

12/24e

3,488

432

25.9

6.5

21.3

1.2

12/25e

3,750

554

34.3

7.6

16.1

1.4

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Update to reflect FX and interest rates

Melrose Industries’ November update for the July to October period included underlying growth of 7% (H124: 12%), with the Engines division up 17%, driven by the aftermarket growing by 32%, and Structure up 1%, reflecting the new build (OE) business suffering from supply chain issues that affected delivery schedules from the primes. Management’s outlook for the full year was unchanged. The positive state of the aerospace markets is also unchanged and, arguably, the resolution of the industrial action at Boeing should assist production schedules.

At the year-end, we have reviewed our assumptions for FX impacts, given the strength of the US dollar in H224, and higher interest rates as anticipated rate cuts have not materialised, while Melrose’s funding is generally on flexible terms. We have also reassessed our dividend expectations in light of management’s capital structure pronouncement, which includes an increased focus on share buybacks (as per the additional £250m buyback announced with the interim results). For FY24, we have reduced our PBT forecast from £452m to £432m (-4.5%), EPS from 26.8p to 25.9p (-3.1%) and DPS from 6.7p to 6.5p (-3.1%). For FY25, we have revised our PBT estimate from £561m to £554m (-1.2%), EPS from 34.7p to 34.3p (-1.2%) and DPS from 9.3p to 7.6p (-18.0%).

Valuation: Positive upside

Our valuation of 654p per share remains unchanged. This reflects the fact that the key component to the valuation is the anticipated cash from the risk and revenue sharing partnerships, where the company guidance of £22bn cash generation remains unchanged. We will revisit and roll forward our discounted cash flow-based valuation with the 6 March results.

Forecast changes

Exhibit 1: Changes to forecasts

£m

FY24e

FY25e

Old

New

Change

Old

New

Change

Revenues

3,677

3,488

(5.1%)

3,849

3,750

(2.6%)

Aerospace operating profit

567

562

(0.8%)

699

699

0.0%

Aerospace operating margin

15.4%

16.1%

0.7%

18.2%

18.6%

0.5%

Normalised operating profit

537

532

(0.9%)

669

669

0.0%

Normalised operating profit margin

14.6%

15.3%

0.7%

17.4%

17.8%

0.5%

Normalised PBT

452

432

(4.5%)

561

554

(1.2%)

Normalised basic EPS (p)

26.8

25.9

(3.1%)

34.7

34.3

(1.2%)

Dividend per share (p)

6.7

6.5

(3.1%)

9.3

7.6

(18.0%)

Net debt/(cash)

1,282

1,355

5.7%

1,360

1,513

11.3%

Source: Edison Investment Research

Exhibit 2: Financial summary

£m

2022

2023

2024e

2025e

Year to 31 December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

2,954

3,350

3,488

3,750

EBITDA

 

292

532

694

829

Operating profit (before amort. and excepts.)

147

390

532

669

Amortisation of acquired intangibles

(260)

(260)

(260)

(260)

Exceptionals

(157)

(73)

(50)

(10)

Reported operating profit

(270)

57

222

399

Net Interest

(58)

(65)

(100)

(115)

Profit Before Tax (norm)

 

89

325

432

554

Profit Before Tax (reported)

 

(328)

(8)

122

284

Reported tax

99

9

(24)

(57)

Profit After Tax (norm)

69

268

341

438

Profit After Tax (reported)

(229)

1

97

227

Minority interests

(5)

0

0

0

Discontinued operations

(80)

(1,020)

0

0

Net income (normalised)

64

268

341

438

Net income (reported)

(314)

(1,019)

97

227

Average Number of Shares Outstanding (m)

1,406

1,349

1,315

1,276

EPS - normalised (p)

 

4.1

19.5

25.9

34.3

EPS - normalised fully diluted (p)

 

4.1

19.1

25.5

33.7

EPS - basic reported (p)

 

(16.6)

(75.5)

7.4

17.8

Dividend (p)

2.3

5.0

6.5

7.6

Revenue growth (%)

8.5

16.6

11.8

9.7

Gross Margin (%)

14.3

35.0

36.0

37.0

EBITDA Margin (%)

9.9

15.9

19.7

22.1

Normalised Operating Margin (%)

5.0

11.6

15.1

17.8

BALANCE SHEET

Fixed Assets

 

11,114

5,611

5,351

5,123

Intangible Assets

6,882

3,397

3,137

2,877

Tangible Assets

2,599

777

777

809

Investments & other

1,633

1,437

1,437

1,437

Current Assets

 

2,873

1,318

1,390

1,453

Stocks

1,025

510

540

566

Debtors

1,426

713

755

791

Cash & cash equivalents

355

58

58

58

Other

67

37

37

37

Current Liabilities

 

2,978

1,533

1,630

1,671

Creditors

2,347

1,179

1,248

1,309

Tax and social security

141

20

20

20

Short term borrowings

63

54

54

54

Other

427

280

308

288

Long Term Liabilities

 

3,841

1,829

1,446

1,013

Long term borrowings

1,433

576

1,359

1,517

Other long-term liabilities

2,408

1,253

87

(504)

Net Assets

 

7,168

3,567

3,664

3,892

Minority interests

39

0

0

0

Shareholders' equity

 

7,129

3,567

3,664

3,892

CASH FLOW

Operating Cash Flow

292

532

691

829

Working capital

(148)

(146)

(100)

(63)

Exceptional & other

(83)

(159)

(305)

(135)

Tax

(8)

17

(82)

(105)

Net operating cash flow

 

53

244

204

527

Capex

(31)

(93)

(162)

(192)

Acquisitions/disposals

(7)

0

0

(50)

Net interest

(82)

(65)

(83)

(105)

Equity financing

0

(93)

(650)

(240)

Dividends

(77)

(81)

(72)

(88)

Net Cash Flow

(144)

(88)

(763)

(148)

Opening net debt/(cash)

 

343

487

572

1,355

Closing net debt/(cash)

 

487

572

1,355

1,513

Source: Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Melrose Industries and prepared and issued by Edison, in consideration of a fee payable by Melrose Industries. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2025 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Melrose Industries and prepared and issued by Edison, in consideration of a fee payable by Melrose Industries. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2025 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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