Melrose Industries — Aerospace rising

Melrose Industries (LN: MRO)

Currency in GBP

Last close As at 25/01/2023

GBP1.42

−2.65 (−1.83%)

Market capitalisation

GBP5,867m

Research: Industrials

Melrose Industries — Aerospace rising

Following the disposal of Ergotron, Melrose has now completed four transactions since 2005 with an average IRR of 28%. Focus now turns to the fifth deal, GKN Aerospace. Recovery in the aerospace market and management confidence to lift margin expectations from 12% to 14%+, along with greater disclosure on the engine contracts, suggest GKN is recovering strongly, albeit value realisation is likely a few years out. In the shorter term, the fully restructured GKN Powder Metallurgy and GKN Automotive operations are likely to be exited, which should provide further support to our 246p/share valuation. Investor attention may also start turning towards the next acquisition and sixth deal.

David Larkam

Written by

David Larkam

Analyst, Industrials

Industrials

Melrose Industries

Aerospace rising

Capital markets, disposal and cash return

Industrials

10 June 2022

Price

164p

Market cap

£7,184m

Net debt (£m) at 31 December 2021

950

Shares in issue

4,372m

Free float

98.7%

Code

MRO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

38.9

44.2

(5.0)

Rel (local)

35.3

33.0

(8.1)

52-week high/low

190.8p

107.6p

Business description

Melrose Industries acquires underperforming industrial companies. It undertakes operational improvements through restructuring and investment before disposing of the assets. Deals are individually financed through new equity (and debt) with proceeds returned in cash post value realisation.

Next events

Interim results

8 September 2022

Analyst

David Larkam

+44 (0)20 3077 5700

Melrose IndustriesMelrose is a research client of Edison Investment Research Limited

Following the disposal of Ergotron, Melrose has now completed four transactions since 2005 with an average IRR of 28%. Focus now turns to the fifth deal, GKN Aerospace. Recovery in the aerospace market and management confidence to lift margin expectations from 12% to 14%+, along with greater disclosure on the engine contracts, suggest GKN is recovering strongly, albeit value realisation is likely a few years out. In the shorter term, the fully restructured GKN Powder Metallurgy and GKN Automotive operations are likely to be exited, which should provide further support to our 246p/share valuation. Investor attention may also start turning towards the next acquisition and sixth deal.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/20

7,723

(41)

(0.6)

0.75

N/A

0.5

12/21

7,496

252

4.1

1.75

40.0

1.1

12/22e

7,718

307

5.6

2.25

29.3

1.4

12/23e

8,334

484

9.2

3.00

17.8

1.8

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

Aerospace upgrade and capital markets day

The key takeaways from the capital markets event were: greater management confidence that the business will return to pre downturn levels by 2025 at the latest (2019 levels adjusted for disposals/exits); increase in the margin guidance on a fully recovered market from 12% to 14%+; and detailed information on the risk and revenue sharing partnerships (RRSPs) in the aero engine business including anticipated cash flows. Management provided additional detail on the recent restructuring activities and growth investment and a general drill down into the sub-divisional activities.

Ergotron disposal completes the Nortek transaction

The disposal of Ergotron for c £520m completes the exit of the Nortek portfolio acquired in 2016. Melrose has now completed four transactions under its ‘buy, improve, sell’ model generating an average internal rate of return (IRR) of 28% and return on equity of 2.7x. The funds from the Ergotron sales are being returned through a £500m buyback rather than the usual capital return.

Forecasts and valuation

We have revised our forecasts for the disposal of Ergotron, the share buyback and the upgrade in Aerospace. Our underlying EPS estimates for 2022 are down 12.8%, for 2023 are down 4.1% and for 2024 increase by 4.9%. Our valuation uses a sum-of-the-parts to reflect the different activities and stages of improvement. We have included a standalone valuation for the Aerospace RRSPs for the first time, but have reduced the valuation of the automotive business from our last model in October 2021. It is also worth noting that we have used quoted peer valuations providing potential upside if a competitive sale process for assets is achieved. Our valuation is at 246p, up from 226p in October 2021.

Aerospace: Capital markets day

Melrose held in-depth presentations on the Aerospace division on 8 June. The key takeaways are described below.

Margin targets increased to 14%+

Management had historically set an operating margin target of 12%, which had been flexed to 12% post the pandemic on full market recovery and 10% without. Management has increased guidance to 14%+ on a fully recovered basis (ie 2019 excluding businesses sold or closed). From 2021 reported operating margins of 4.4%, 6% of the upside is expected to come from operational benefits generated by end market recovery and 4% from internal actions to achieve the 14%+ target. These actions are detailed in Exhibit 1 along with the benefits outlined in 2018 from the original restructuring.

Exhibit 1: Route to margin improvement

2022 actions

Savings (£m)

2018 actions

Savings (£m)

Operational excellence

50

Operational excellence

70+

Commercial actions

45

Procurement

40

Restructuring

50

SG&A

40

Total

145

Total

150+

Margin improvement

4%

Margin improvement

4%

Source: Melrose, Edison Investment Research

Recovery expected back to pre-pandemic levels by c 2025

GKN Aerospace was badly affected by the downturn in aerospace, with revenues in 2020 declining 27% and operating margin falling to 0.5%. Management is now expecting annual underlying growth (ie excluding activities exited) of over 10% a year to 2025 (7% post 2025). This reflects GKN’s bias toward civil over defence (59% to 41%) and a positive mix within civil highlighted by airframe and components exposure to narrow bodied and regional aircraft (39% and 37%) against the slower-to-recover wide bodied segment (24%). This recovery, along with the margin progression expectations, is reflected in updated Edison forecasts shown in Exhibits 2 and 3. Note that revenue is not expected to return to absolute 2019 levels due to disposals/exits.

Exhibit 2: Revenue and organic growth

Exhibit 3: Operating profit and margin

Source: Melrose Industries, Edison Investment Research

Source: Melrose Industries, Edison Investment Research

Exhibit 2: Revenue and organic growth

Source: Melrose Industries, Edison Investment Research

Exhibit 3: Operating profit and margin

Source: Melrose Industries, Edison Investment Research

Growth potential

Given the recent difficulties in the aerospace sector and to highlight that the ‘improve’ element of Melrose’s strategy is not solely focused on margin, it is worth noting some of the continued investment being undertaken to promote organic growth as highlighted in the presentation:

Expanding the engine repair business, with shop visits expected to grow at a compound rate of 11% to 2030 and sales expected to increase by over £100m by 2025.

Engine manufacturing technology adoption, such as additive manufacturing where GKN has been an early user, is expected to generate over £150m of additional sales between 2021 and 2025.

Expansion in China through a joint venture with COMAC and AVIC, including supplying the narrow bodied C919. Management plans to expand manufacturing footprint by over 10x and sales to increase from c £60m in 2021 to over £250m by 2030.

Investment in next-generation technology. This includes current areas of expertise such as the Wing of the Future programme in collaboration with Airbus looking at composites, wing profile and manufacturing techniques. In addition, GKN is involved in a range of future technology projects including electric, hydrogen fuel cell and alternative fuel powered aircraft with over £100m invested (including grants). Commercialisation for most of these programmes is unlikely until 2030 onwards, although the business does have components on smaller commuter electric aircraft, such as Vertical Aerospace’s VX4, expected to be certified and to start production before 2025.

RRSPs

The RRSPs relate to participation in engine programmes and came with GKN’s acquisition of Volvo Aerospace. In RRSPs, the supplier and engine manufacturer cooperate in the design, production and life cycle support of an engine and, for additional financing/risk taken on board (eg there are no volume guarantees), the supplier is considered as a partner and therefore entitled to a share of the future revenues. GKN’s components are life-of-product rather than wear items. As a consequence, GKN is effectively investing at lower margin or a loss on supply of its components to the new build engine and is compensated as the aftermarket spares revenue comes through over the life of the engine, despite not supplying any aftermarket product.

Currently RRSPs account for 17% of aerospace revenues. However, this is expected to increase significantly, as highlighted in Exhibit 4. Note that, given the limited cost associated as GKN produces no aftermarket product, the cash generation and profit are expected to be of a similar magnitude.

Exhibit 4: RRSP cash flows

Source: Melrose 2022 Aerospace capital markets presentation


Corporate activity and share buyback programme

Melrose’s latest disposal completes the 2016 Nortek transaction and, along with the cash retained from the 2021 disposals, provides further cash to return to shareholders.

Disposal of Ergotron

Melrose has agreed to sell Ergotron, a high-margin ergonomic furniture business and the final element of the Nortek acquisition, to The Sterling Group, a private equity group, for c $650m (c £520m). The deal is expected to close in early Q322. The price translates to EV/EBIT of 9.0x and EV/EBITDA of 8.4x based on 2021 reported numbers.

Validation of the model

The disposal of Ergotron completes the Nortek transaction and the fourth cycle of the group’s ‘buy, improve, sell’ model. Exhibit 5 highlights the returns with an average IRR of 28% and return on equity of c 2.7x.

Exhibit 5: Deal summary since listing

Acquired

Company

Activity

Sold

ROE (x)

IRR (%)

2005

McKechnie/Dynacast

Aerospace components/zinc die casting

2007–11

3.0

30

2008

FKI

Turbogenerators, lifting products, wire, door hardware

2013–21

3.4

33

2012

Elster

Water and gas meters

2015

2.3

33

2016

Nortek

Ventilation

2021–22

>2

17

Source: Edison Investment Research

Proposed share buyback

Melrose has historically returned cash to shareholders through a capital return and associated share consolidation, the last being 15p/share in 2021. However, management has announced its first buyback programme following the proposed disposal of Ergotron. A £500m programme is expected to be completed by the end of October 2022. The impact will inevitably depend on the price paid, but at 150p a share would reduce shares in issue by c 7.6%. Post the return, leverage (net debt/EBITDA) would increase to c 1.5x.

Valuation

Our valuation is based on a sum-of-the-parts to reflect the different activities within the group. Within this model, valuations used primarily reflect quoted company valuations and are based on recovered earnings to reflect the ‘improve’ element of the strategy and the more likely value on disposal.

Aerospace

Exhibit 6 highlights the valuation of the aerospace peer group used based on 2025 expectations, when the sector is expected to have returned to more normal (pre-pandemic) levels of activity and we expect GKN Aerospace margins to be in the target range.

Exhibit 6: Aerospace peer group valuations based on 2025 consensus forecasts

EV/EBIT (x)

EV/EBITDA (x)

Operating margin

Senior

9.0

5.5

8.2%

MTU

11.6

8.4

13.4%

FACC

9.3

5.4

7.2%

Spirit

5.8

4.4

11.6%

Triumph

7.0

5.5

13.5%

Average

7.9

5.6

10.8%

Median

8.0

5.4

11.6%

Source: Refinitiv 8 June 2022

Aerospace RRSPs

RRSPs have long held a potential value and are now starting to come to fruition, offering meaningful cash flows in the near future, as shown in Exhibit 4. Exhibit 7 highlights the net present value (NPV) of these cash flows as provided by Melrose. Our model, using the limited information provided, supports these numbers and adds a further conservative valuation using a discount factor of 12.5%. Melrose points to the mid-point valuation of £5bn. Our view is that it is unlikely that this cash stream can easily be divested as a standalone operation, and if it were, it would arguably reduce the likely interest and value in the core aerospace business. We use Melrose’s cost of capital valuation of £3.7bn and reduce this by £900m or 20% of the underlying value of the aerospace division to avoid double counting, as RRSPs account for 17% of Aerospace sales, giving a valuation of £2.8bn. It is also worth noting that the cash flows extend beyond the International Air Transport Association’s target for ‘net zero’ by 2050, including the use of alternative fuels and power sources (ie different engines).

Exhibit 7: RRSPs valuation

 

Debt interest rate

Midpoint

Melrose cost of capital

Conservative

Discount rate (%)

5.0

7.5

10.0

12.5

NPV (£bn)

7.0

5.0

3.7

2.8

Source: Melrose, Edison Investment Research

Automotive

Exhibit 8 highlights the valuation of the automotive peer group used based on 2024, when IHS Markit and other industry forecasters anticipate a more steady state, after current supply chain issues affect 2022 and an anticipated bounce back in 2023. In our view, this is also the likely time frame for any transaction.

Exhibit 8: Automotive peer group valuations based on 2024 forecasts

EV/EBIT (x)

EV/EBITDA (x)

Operating margin

American Axle

7.9

4.3

7.9%

Dana

7.0

4.5

6.2%

Magna

6.5

4.4

7.6%

Nexteer

4.0

2.1

7.0%

NTN

12.4

7.5

4.7%

Borg Warner

5.8

4.4

11.1%

TI Fluid Systems

5.6

3.8

8.1%

Average

7.0

4.4

7.5%

Median

6.5

4.4

7.6%

Source: Refinitiv 9 June 2022

Powder Metallurgy

Melrose was widely reported to be looking at a sale of Powder Metallurgy in 2018, with a price tag of £1.5–1.6bn, but a declining automotive market precluded the possibility of a deal. This would have suggested a valuation of 11x 2018 EBIT (Powder Metallurgy’s 2018 operating margin was 11.8%). The only previous deal of scale in the sector was the 2013 acquisition of Höganäs, GKN’s key competitor in powders, at a valuation of c 13.8x 2012 EBIT (operating margin 13.5%). The Powder Metallurgy business is automotive orientated (c 80%), and there are concerns over key end markets such as transmission gears in the future electric vehicle environment, which might suggest a slight reduction in potential valuation, albeit there is also potential upside from Powder Metallurgy magnet production, which the business is investing in. However, we are expecting the business to be sold in 2023, when we are forecasting margins of 11.5%, which is still some way below Melrose management’s target of 14%, suggesting upside potential. Hence, we see our valuation multiple of 10x on 2023 forecasts as balanced.

Hydrogen

The group’s hydrogen storage business is a nascent technology company currently entering field trials, suggesting full commercialisation is still a number of years away, making any valuation somewhat subjective. The closest peer, in our view, is Hexagon Purus (HEXAB.SS), which supplies high-pressure cylinders for hydrogen storage along with battery packs for electric vehicles and has a market capitalisation of c £750m. Hexagon is arguably more advanced than GKN Hydrogen, with sales for the current year expected to be £75m (GKN Hydrogen: less than £10m) and has two business streams, suggesting GKN Hydrogen at present should be valued at a discount, at least until there is greater acceptance of the technology. To reflect the level of investment at over £10m a year and progress to trial units, we have pencilled in an arbitrary £200m. We appreciate this is an unstructured estimate reflecting the lack of information available and uncertainties, but at c 1.5% of the total group valuation, the overall impact of any error is small.

Overall valuation

Exhibit 9 combines the operational activity valuations discusses along with the pension contribution at zero following the improved funding position, net debt forecast at the end of 2022 and management long term incentive plan (LTIP). Note that our sum-of-the-parts valuation per share is adjusted for the full share buyback (assumed at 150p).

Exhibit 9: Sum-of-the-parts valuation

Sales
(£m)

Operating margin (%)

EBIT
(£m)

EBIT multiple
(x)

Valuation
(£m)

Expected realisation and valuation year

Aerospace

3466

14.0%

485.3

8.0

3,882

2025

Aerospace RRSPs

2,900

2025

Automotive

4492

10.0%

449.2

7.0

3,144

2024

Powder Metallurgy

1103

11.5%

126.9

10.0

1,269

2023

Hydrogen

200

2025

Pension top-up requirements

0

Cash/(debt) (forecast December 2022)

(1,185)

Management LTIP

(289)

Net valuation

9,964

Number of shares (m)

4,039

Valuation per share (p)

246

Source: Edison Investment Research


Forecasts

There have been no changes to current trading; see our update note published on 12 April. However, we have updated our forecasts to reflect:

the disposal of Ergotron;

completion of the £500m buyback (assumed at 150p/share); and

the increased margin and growth expectations in Aerospace.

Overall, the Ergotron disposal dilution is not fully reversed by the buyback, and the Aerospace upgrade, while suggesting some benefit in the short term, has a greater impact in 2024 and onwards.

Exhibit 10: Forecast changes

£m

2022e

2023e

2024e

Old

New

Change

Old

New

Change

New

Revenues

7699

7718

0.2%

8,348

8,334

-0.2%

8,848

EBITDA

894

831

-7.0%

1,081

1,016

-6.1%

1,273

EBITDA margin

11.6%

10.8%

-7.3%

13.0%

12.2%

-5.9%

14.4%

Normalised operating profit

484

431

-10.9%

681

626

-8.2%

873

Normalised operating profit margin

6.3%

5.6%

-0.7%

8.2%

7.5%

-0.7%

9.9%

Normalised basic EPS (p)

6.38

5.56

-12.8%

9.56

9.17

-4.0%

13.42

Dividend per share (p)

2.25

2.25

0.0%

3.00

3.00

0.0%

4.00

Net cash/(debt)

(1,134)

(1,185)

4.5%

(1,174)

(1,271)

8.2%

(1,030)

Source: Edison Investment Research

Exhibit 11: Financial summary

£m

2020

2021

2022e

2023e

2024e

Year to 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue (ex-associates)

7,723

7,496

7,718

8,334

8,848

Cost of Sales

(6,858)

(6,394)

(6,483)

(6,917)

(8,848)

Gross Profit

865

1,102

1,235

1,417

0

EBITDA

521

734

831

1,016

1,273

Operating profit (before amort/excepts)

141

375

431

626

873

Amortisation of acquired intangibles

(472)

(452)

(452)

(452)

(452)

Exceptionals

(156)

(374)

(250)

(200)

(100)

Share-based payments

Reported operating profit

(487)

(451)

(271)

(26)

321

Net Interest

(182)

(123)

(124)

(142)

(143)

Joint ventures & associates (post tax)

0

0

0

0

0

Profit Before Tax (norm)

(41)

252

307

484

730

Profit Before Tax (reported)

(669)

(574)

(395)

(168)

178

Reported tax

114

172

0

0

0

Profit After Tax (norm)

(27)

197

240

373

547

Profit After Tax (reported)

(555)

(402)

(395)

(168)

178

Minority interests

(3)

(4)

(2)

(2)

(5)

Discontinued operations

32

1,283

0

0

0

Net income (normalised)

(30)

193

238

371

542

Net income (reported)

(526)

877

(397)

(170)

173

Average Shares Outstanding (m)

4,858

4,695

4,272

4,039

4,039

EPS - normalised (p)

(0.6)

4.1

5.6

9.2

13.4

EPS - normalised fully diluted (p)

(0.6)

4.1

5.6

9.2

13.4

EPS - basic reported (p)

(11.0)

18.7

(9.3)

(4.2)

4.3

Dividend (p)

0.75

1.75

2.25

3.00

4.00

Revenue growth (%)

(-20.0)

2.0

2.3

8.6

7.0

Gross Margin (%)

11.2

14.7

16.0

17.0

0.0

EBITDA Margin (%)

6.7

9.8

10.8

12.2

14.4

Normalised Operating Margin

1.8

5.0

5.6

7.5

9.9

BALANCE SHEET

Fixed Assets

13,515

11,438

11,136

10,844

10,442

Intangible Assets

9,299

7,437

6,985

6,533

6,081

Tangible Assets

3,133

2,528

2,678

2,838

2,888

Investments & other

1,083

1,473

1,473

1,473

1,473

Current Assets

3,165

2,584

2,608

2,698

2,774

Stocks

1,126

893

903

942

975

Debtors

1,658

1,184

1,197

1,249

1,293

Cash & cash equivalents

311

473

473

473

473

Other

70

34

34

34

34

Current Liabilities

3,363

3,124

3,051

3,120

3,176

Creditors

2,456

2,051

2,074

2,163

2,239

Tax and social security

188

142

142

142

142

Short term borrowings

165

462

462

462

462

Other

554

469

373

353

333

Long Term Liabilities

6,207

3,358

3,631

3,631

3,212

Long term borrowings

2,926

903

1,196

1,282

1,041

Other long-term liabilities

3,281

2,455

2,435

2,349

2,171

Net Assets

7,110

7,540

7,061

6,790

6,828

Minority interests

29

33

33

33

33

Shareholders' equity

7,081

7,507

7,028

6,757

6,795

CASH FLOW

Operating Cash Flow

521

734

831

1,016

1,273

Working capital

371

62

(22)

(62)

(51)

Exceptional & other

(9)

(321)

(335)

(250)

(130)

Tax

(14)

(65)

(68)

(111)

(182)

Net operating cash flow

869

410

407

593

909

Capex

(265)

(225)

(500)

(500)

(400)

Acquisitions/disposals

(11)

2,693

500

0

0

Net interest

(127)

(137)

(60)

(78)

(133)

Equity financing

0

(730)

(500)

0

0

Dividends

0

(69)

(82)

(101)

(134)

Other

Net Cash Flow

466

1,942

(235)

(86)

241

Opening net debt/(cash)

3,283

2,847

950

1,185

1,271

FX

7

40

0

0

0

Other non-cash movements

(37)

(85)

0

0

0

Closing net debt/(cash)

2,847

950

1,185

1,271

1,030

Source: Melrose Industries, Edison Investment Research

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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.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

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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.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Immunicum — Ilixandencel awarded orphan drug designation

Ilixadencel, Immunicum’s cell-based cancer immunotherapy, has been granted orphan drug designation (ODD) by the FDA as a treatment for gastrointestinal stromal tumours (GIST). The treatment is currently in preparations to start a Phase II trial in GIST, which we expect to begin later this year, in combination with tyrosine kinase inhibitors (TKIs). The ODD award adds to the fast-track designation previously awarded to ilixadencel in GIST in December 2020, highlighting the unmet medical need in this indication. GIST are a rare type of gastrointestinal tumour for which TKIs are commonly prescribed. The ODD award represents further external recognition for ilixadencel and Immunicum’s underlying platform, in our view.

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