Melrose Industries — Positive progress continues

Melrose Industries (LSE: MRO)

Last close As at 04/11/2024

GBP4.88

12.50 (2.63%)

Market capitalisation

GBP6,121m

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Research: Industrials

Melrose Industries — Positive progress continues

Melrose Industries’ impressive H1 performance demonstrates the strength of the business, assisted by aftermarket exposure, given the current supply chain issues in the aerospace sector. A new buyback programme and investment in future organic growth, along with positive market dynamics, offer further positive earnings drivers through the medium term.

David Larkam

Written by

David Larkam

Analyst, Industrials

Industrials

Melrose Industries

Positive progress continues

Interim results

Aerospace and defence

1 August 2024

Price

556p

Market cap

£7bn

Net debt (£m) at 30 June 2024

976

Shares in issue

1,311m

Free float

98.7%

Code

MRO

Primary exchange

LSE

Share price performance

%

1m

3m

12m

Abs

6.4

(6.8)

11.1

Rel (local)

3.2

(10.0)

1.6

52-week high/low

668p

447p

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

Full year results

March 2025

Analyst

David Larkam

+44 (0)20 3077 5700

Melrose Industries is a research client of Edison Investment Research Limited

Melrose Industries’ impressive H1 performance demonstrates the strength of the business, assisted by aftermarket exposure, given the current supply chain issues in the aerospace sector. A new buyback programme and investment in future organic growth, along with positive market dynamics, offer further positive earnings drivers through the medium term.

Year end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/22

2,954

89

4.1

2.3

151

0.4

12/23

3,350

331

19.5

5.0

31.7

0.8

12/24e

3,677

452

26.8

6.7

23.1

1.1

12/25e

3,849

561

34.7

9.3

17.8

1.5

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

Results overview

Melrose’s revenue increased by 9% (12% excluding business exited) to £1.7bn and, at the aerospace operating level, the operating margin increased 420bp to 14.9%. Adjusted group operating profit for H1 was £247m (+55%), adjusted PBT was £204m (+52%) and adjusted EPS was 11.9p (+59%), benefiting from the current share buyback programme. DPS was 2.0p (+33%) and net debt was £976m, with a net debt/EBITDA of 1.7x after £336m of the £500m buyback programme completed.

Divisional performance

Engines’ revenue growth of 21% was driven by aftermarket growth of 31%, with the engine repair and defence operations being particularly strong. Melrose’s adjusted operating margin increased from 24.5% to 29.4%, which was assisted by mix and previous restructuring. Structures’ underlying sales growth was 6%, with the operating margin up from 2.5% to 4.7%. This benefited from restructuring, exiting/repricing certain business and three small disposals. Both divisions achieved strong performance despite the current difficulties in the aerospace supply chain, which is affecting civil production rates (eg Airbus cut 2024 delivery expectations from 800 to 770 aircraft).

Guidance update and additional share repurchase

Management’s guidance for FY24 is unchanged. Its targets for FY25 remain the same at the EBIT level (£700m, before c £30m PLC costs), with higher margins (additional aftermarket mix and restructuring benefit) due to offset the reduction in sales expectations (£3.8bn, from £4.0bn). As part of the capital allocation policy, an additional £250m share buyback programme has been announced, which is running to March 2026. This is expected to leave gearing within the target net debt/EBITDA of 1.5–2.0x.

Forecasts and valuation

The change to Edison profit forecasts comes from the additional £250m share buyback, with FY25 sales reduced by c 4%, offset by additional margin expectations. Our FY24 forecasts are unchanged. FY25 PBT is £561m, down from £566m (-0.9%), EPS is 34.7p, up from 34.5p (+0.6%), and net debt is £1.4bn, up from £1.2bn. Our valuation remains unchanged at 654p per share.

Exhibit 1: Forecast summary

£m

2022

2023e

2024e

2025e

Year to December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

2,954

3,350

3,677

3,849

EBITDA

 

292

532

699

839

Operating profit (before amort. and excepts.)

147

147

390

537

Amortisation of acquired intangibles

(260)

(260)

(260)

(260)

Exceptionals

(157)

(73)

(50)

(10)

Reported operating profit

(270)

57

227

399

Net Interest

(58)

(65)

(84)

(108)

Profit Before Tax (norm)

 

89

325

452

561

Profit Before Tax (reported)

 

(328)

(8)

142

291

Reported tax

99

9

(28)

(58)

Profit After Tax (norm)

69

268

357

443

Profit After Tax (reported)

(229)

1

114

233

Minority interests

(5)

0

0

0

Discontinued operations

(80)

(1,020)

0

0

Net income (normalised)

64

268

357

443

Net income (reported)

(314)

(1,019)

114

233

Average Number of Shares Outstanding (m)

1,406

1,349

1,335

1,276

EPS - normalised (p)

 

4.1

19.5

26.8

34.7

EPS - normalised fully diluted (p)

 

4.1

19.1

26.8

34.6

EPS - basic reported (p)

 

(16.6)

(75.5)

8.5

18.2

Dividend (p)

2.3

5.0

6.7

9.3

Revenue growth (%)

8.5

16.6

15.6

9.8

Gross Margin (%)

14.3

35.0

36.0

37.0

EBITDA Margin (%)

9.9

15.9

19.0

21.8

Normalised Operating Margin

5.0

11.6

14.6

17.4

8.5

16.6

15.6

9.8

BALANCE SHEET

Fixed Assets

 

11,114

5,611

5,400

5,208

Intangible Assets

6,882

3,397

3,137

2,877

Tangible Assets

2,599

777

826

894

Investments & other

1,633

1,437

1,437

1,437

Current Assets

 

2,873

1,318

1,414

1,478

Stocks

1,025

510

550

577

Debtors

1,426

713

769

806

Cash & cash equivalents

355

58

58

58

Other

67

37

37

37

Current Liabilities

 

2,978

1,533

1,653

1,695

Creditors

2,347

1,179

1,271

1,333

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

1,479

1,077

Long term borrowings

1,433

576

1,286

1,364

Other long term liabilities

2,408

1,253

193

(287)

Net Assets

 

7,168

3,567

3,681

3,914

Minority interests

39

0

0

0

Shareholders' equity

 

7,129

3,567

3,681

3,914

CASH FLOW

Operating Cash Flow

292

532

699

839

Working capital

(148)

(146)

(98)

(43)

Exceptional & other

(83)

(159)

(305)

(135)

Tax

(8)

17

(85)

(106)

Net operating cash flow

 

53

244

210

555

Capex

(31)

(93)

(211)

(238)

Acquisitions/disposals

(7)

0

0

0

Net interest

(82)

(65)

(70)

(98)

Equity financing

0

(93)

(565)

(200)

Dividends

(77)

(81)

(74)

(96)

Other

Net Cash Flow

(144)

(88)

(710)

(78)

Opening net debt/(cash)

 

343

487

572

1,282

Closing net debt/(cash)

 

487

572

1,282

1,360

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 2024 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

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 2024 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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