Melrose Industries — Growth outweighs tariff uncertainty

Melrose Industries (LSE: MRO)

Last close As at 29/04/2025

GBP4.32

−3.00 (−0.69%)

Market capitalisation

GBP5,508m

More on this equity

Research: Industrials

Melrose Industries — Growth outweighs tariff uncertainty

Melrose Industries’ end markets remain positive and the company is trading strongly, in line with management’s expectations, with guidance unchanged. Uncertainty over the impact of US tariffs is affecting sentiment on the shares. As the benefit of Melrose’s mitigation actions becomes clear, we would expect the valuation discount to reduce once more.

David Larkam

Written by

David Larkam

Analyst, Industrials

Aerospace and defence

Q1 trading update

30 April 2025

Price 432.00p
Market cap £5,508m

Net cash/(debt) at 31 December 2024

£(1,321.0)m

Shares in issue

1,274.9m
Free float 99.0%
Code MRO
Primary exchange LSE
Secondary exchange N/A
Price Performance
% 1m 3m 12m
Abs (9.1) (27.0) (31.9)
52-week high/low 677.4p 376.0p

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 and revenue sharing partnership investments on multiple engine programmes.

Next events

Interim results

31 July 2025

Analyst

David Larkam
+44 (0)20 3077 5700

Melrose Industries is a research client of Edison Investment Research Limited

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

Year end Revenue (£m) PBT (£m) EPS (p) DPS (p) P/E (x) Yield (%)
12/23 3,350.0 325.0 19.50 5.00 22.2 1.2
12/24 3,468.0 438.0 26.80 6.00 16.1 1.4
12/25e 3,615.0 556.0 34.40 6.90 12.6 1.6
12/26e 3,921.0 711.0 44.70 8.90 9.7 2.1

Q1 trading in line with expectations

Trading in Q1 was in line with management’s expectations. The Engines division revenue increased 9%, driven by original equipment, with positive mix and growth in the aftermarket against a more difficult comparator, particularly due to the strong Swedish military activity in 2024. Melrose’s margins also improved, assisted by volume drop-through. The Structures division revenue increased 4% (organic) despite continued constraints in the aerospace supply chain. More importantly, the operating margin benefited from the restructuring programmes and other actions, such as the repricing of works.

Tariff impact expected to be mitigated

US tariffs provide significant uncertainty at present, not least due to the lack of clarity and the complexity of the aerospace supply chain. Management believes it can mitigate the impact on direct operations, primarily components into the US, through a range of actions, including exemptions (particularly in military programmes), contractual protections, drawback, adjusting the supply chain and price/cost negotiations. The potential secondary effects in such a complex sector are more difficult to assess. This is clearly a fluid situation.

Foreign exchange sensitivity poses downside risk

Melrose highlighted that a 10% change in the US dollar to sterling exchange rate in isolation would have a £47m, or 8.7% full year impact on operating profit using FY24 results. There would be some mitigation at the PBT level given c 80% of debt is in US dollars, so we would expect a c 7.5% potential impact to PBT going forward. Edison forecasts assume an exchange rate of £/$1.25, in line with rates in Q1 but, with current rate of £/$1.34, there is clearly downside risk.

Valuation: Unchanged

There is no change to management’s guidance for the full year. Our forecasts remain unchanged, albeit we note the foreign exchange risk, as does our valuation of 709p per share, last reviewed in our March results note.

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