Results ahead of Edison forecasts

Underlying sales growth was 11% to £3.5bn and operating margins improved 380bp to 16.3% (Engines 28.9%, Structures 7.2%). Underlying PBT increased 36% to £438m (Edison forecast £432m), with EPS growth of 45% to 26.8p (Edison forecast 25.9p) benefiting from the share buy-back programme. The dividend was increased 20% with cover at 4.5x. Net debt increased from £572m to £1,321m (1.9x EBITDA), primarily reflecting restructuring spend of £126m along with the buy-back and LTIP.

Outlook and forecasts

Management confirmed its FY25 profit guidance, albeit, with the continued disruption in the civil aerospace sector, the top-line expectation is a little softer. Management guidance is for FY25 revenue of £3.55–3.70bn and adjusted operating profit before central costs of £680–720m, reflecting an adjusted operating margin of over 19%. Our FY25 forecasts are essentially unchanged, with a revenue reduction of 3.6% offset by increased margin expectations (+120bp) reflecting the mix and the Engines division having attained management’s FY25 target margin in FY24. We have reduced our dividend growth expectation to reflect management’s move to 5x cover with a preference for share buy-backs. We also introduce FY26 forecasts.

Longer-term guidance to 2029

Management has provided longer-term guidance based on the broader industry growth expectations, internal investments in areas such as additive fabrication, completion of the restructuring programme and the positive runway for the RRSPs, in particular the GTF engine, which is expected to turn cash positive. Guidance includes revenue of £5.0bn (c 8% CAGR), adjusted operating profit of at least £1.2bn, an operating margin of over 24%, an adjusted diluted EPS CAGR of over 20% excluding the impact of any further buy-backs (we estimate EPS of c 70p a share in FY29) and annual free cash flow of £600m (after interest and tax).

Valuation: Positive upside remains

We have increased our valuation from 654p to 709p/share. Non-RRSP operations are valued against peers and we have rolled forward the RRSP cash flow model.

Full year results

Overall

FY24 was another strong year, with underlying sales growth of 11% despite the well-documented issues in the civil aerospace sector (note this excludes a currency headwind of c £70m and the impact of business exits). Operating margins improved 380bp to 16.3%. Underlying PBT increased 36%, with EPS growth of 45% benefiting further from the share buy-back programme (the current £250m programme runs to March 2026). The dividend was increased 20% with cover at 4.5x.

Divisional performance

The Engines division generated strong growth of 26%, with aftermarket (AM) contributing 32% and original equipment (OE) 19%. AM revenue growth was driven by military, up 74% due to the extended support of the Gripen fighter programme, and parts repair was up 18%, benefiting from the growth in flying hours and additional capacity investment. In addition, the important high-margin RRSP business was up 30%. Operational leverage, internal actions and mix helped the operating margin expand 290bp to 28.9%, achieving management’s FY25 target a year early.

The Structures division’s organic underlying revenue growth was 3%, after taking into account exited businesses. Defence was strong, up 7%, with civil up only 1%, driven by business jets, reflecting the difficulties in the civil airliner market from supply chain problems and Boeing’s issues, albeit Melrose signficantly more exposed to Airbus,, leaving deliveries from the two majors (Airbus and Boeing) down 12% in the year. Operating margins increasing from 5.1% in 2023 to 7.2%, benefiting from restructuring, exiting businesses and repricing of contracts now 61% achieved, up from 42% (end of FY25 target: 85%). The business appears on track to achieve the previously guided FY25 margin of 9%, and we estimate the seasonally stronger H224 margin was 9.7%, providing confidence.

Cash flow

Working capital increased to support top-line growth and included £309m for ‘unbilled work done’ as part of the RRSPs IFRS 15 long-term contract accounting requirement (see the Melrose RRSP guidance booklet). Exceptional costs included £126m on restructuring and pension cash financing of £20m. The equity expenditure included the share buy-back programme and the maturing of the previous LTIP programme. Net debt increased to £1.3bn, with net debt/EBITDA 1.9x, within management’s 1.5–2.0 target range.

2025 outlook and forecasts

Key elements of management’s guidance for 2025 are:

• A revenue range of £3.55–3.70bn, which would suggest growth of c 5% at the mid point. This takes into account the continued supply chain issues in the orginal equipment (OE) aerospace sector, as recently highlighted by Airbus. We expect growth to be below the civil sector overall (see Exhibit 5), as a recovery in Boeing deliveries is likely to be a key driver of the sector, with Melrose more weighted to Airbus. Note on the military side, the F35 is expected to see a strong recovery in volumes in 2025. Melrose announced plans in 2024 to double canopy capacity by 2027.
• Adjusted operating profit before central costs is maintained at £680–720m, reflecting an adjusted operating margin of over 19%, up from 16.3% reported in FY24. Divisional performance guidance was for an Engines margin of over 32%, from 28.9% in FY24, and a Structures margin of 9%, from 7.2% in FY24.

Note that management has not included any impact from potential tariffs at this stage. While the group has some business from Mexico into the US, it is unclear what the impact will be or who will pay, as aerospace contracts tend to have pass-through clauses.

The guidance sees us trim our sales forecasts modestly, but retain our profit forecast, reflecting margins tracking ahead of previous expectations. We have also reduced our dividend forecast, reflecting management’s preference for share buy-backs to return funds to shareholders, assuming a payout ratio of 20%.

Longer-term five-year guidance

Management has provided longer-term financial guidance for five years out to FY29. The key elements are:

• Revenue of c £5.0bn in 2029, which equates to a CAGR of c 8%.
• Adjusted operating profit of at least £1.2bn after central costs (high £30m by 2029), with an operating margin of over 24%.
• An adjusted diluted EPS CAGR of over 20% excluding the impact of any further buy-backs (post the £250m programme already underway).
• Free cash flow of £600m (after interest and tax) in 2029.

The guidance is based on the growth plans of the key civil aerospace companies along with current military expectations, excluding any potential increases from rising European budgets. Internal growth initiatives include the already announced £300m investment in additive manufacturing, ramp-up from COMAC in China and continued growth of the RRSP contribution. In cash flow terms, the key RRSP programme, the P&W GTF, is expected to become cash positive, with exceptional costs such as restructuring and GTF powder rectification programme completed. This is after an anticipated variable consideration of c £500m for the RRSP portfolio.

Exhibit 8 highlights the potential progression in financials in achieving these targets. We estimate that, if guidance is met, EPS will be c 70p in 2029.

Valuation

Our valuation methodology remains unchanged. We split Melrose into two parts: the RRSPs (which are associated with the Engines division’s aftermarket) and the remaining operations, primarily manufacturing operations in Structures and the Engines division.

The RRSP cash expectations are unchanged, as is the discount factor we use of 8.0%, but rolling the model forward has a significant impact on the net present value (NPV), which increases from £5.3bn to £5.7bn (note that the FY24 results presentation includes management’s latest figure of £6.0bn, using a discount rate of 7.5%).

For the remainder of the group we use a peer-based valuation, as shown in Exhibit 9.

These two elements are then combined to provide our overall valuation of 709p/share as per Exhibit 10, which also highlights how our valuation has progressed since the demerger of Dowlais in 2023.