Melrose Industries — Crystallisation of the 2020 Employee Share Plan

Melrose Industries (LSE: MRO)

Last close As at 19/07/2024

GBP5.46

−21.40 (−3.77%)

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GBP7,177m

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Research: Industrials

Melrose Industries — Crystallisation of the 2020 Employee Share Plan

The crystallisation of the employee plan highlights the value created through the GKN acquisition, benefiting from the strong performance from the restructuring programme and current positive trends in the aerospace sector. The impact of the scheme on our forecasts will be limited, having already assumed the full value the scheme would accrue. There are no changes to our valuation of 654p per share as set out in our previous note.

David Larkam

Written by

David Larkam

Analyst, Industrials

Industrials

Melrose Industries

Crystallisation of the 2020 Employee Share Plan

LTIP maturity

Aerospace and defence

3 June 2024

Price

621p

Market cap

£8bn

Net debt (£m) at 31 December 2023

572

Shares in issue

1,329m

Free float

99%

Code

MRO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.5)

(3.0)

30.6

Rel (local)

(4.4)

(10.6)

17.6

52-week high/low

678p

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

Interim results

September 2023

Analysts

David Larkam

+44 (0)20 3077 5700

Melrose Industries is a research client of Edison Investment Research Limited

The crystallisation of the employee plan highlights the value created through the GKN acquisition, benefiting from the strong performance from the restructuring programme and current positive trends in the aerospace sector. The impact of the scheme on our forecasts will be limited, having already assumed the full value the scheme would accrue. There are no changes to our valuation of 654p per share as set out in our previous note.

Year end

Revenue (£m)

PBT*

(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/22

2,954

89

4.1

2.3

151.5

0.4

12/23

3,350

331

19.5

5.0

31.8

0.8

12/24e

3,677

452

26.8

6.7

23.2

1.1

12/25e

4,028

566

34.5

9.3

18.0

1.5

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

Scheme achieves full payout

The 2020 long-term incentive plan (LTIP) matured on 31 May. The scheme provided for 7.5% of the value created, adjusted for cost of capital, to be ascribed to executive and senior management. The scheme has attained the full payout to the limit put in place.

Payout in cash rather than shares

The payout is due in shares, with 28.8m shares transferred to the recipients. However, the tax and PAYE liabilities are to be settled by the company in cash rather than issuing shares and selling on the market (to then be bought back through the current £500m repurchase scheme). This will reduce the number of shares issued by 29.2m. The initial cash cost will be £158.1m, with smaller elements over the following two years to reflect deferred shares to Peter Dilnot, CEO, as part of the potential clawback set out in the scheme.

Valuation: Minimal impact on forecasts

The impact of the scheme on our forecasts will be limited, having already assumed the full value the scheme would accrue. The decision to use the company cash will reduce the level of dilution. Share dilution will be c 2% lower than our expectations although the additional debt will carry finance costs, reducing our forecast PBT by 1.5%. We estimate an overall benefit of c 0.5% to EPS for the full year (ie FY25). Our net debt figure increases by £158m, still well within facilities, assisted by the strong cash generation of the group. Our new forecasts are: FY24 PBT of £452m from £456m (-0.8%) and EPS of 26.8p from 26.7p (+0.2%); and FY25 PBT of £566m from £575m (-1.6%) and EPS of 34.5p from 34.3p (+0.6%). Our net debt forecast increases from £1.1bn to £1.3bn in FY24. There are no changes to our valuation set out in our previous note.

Exhibit 1: Financial summary

£m

2022

2023

2024e

2025e

Year to December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

2,954

3,350

3,677

4,028

EBITDA

 

292

532

699

839

Operating profit (before amort. and excepts.)

147

390

537

669

Amortisation of acquired intangibles

(260)

(260)

(260)

(260)

Exceptionals

(157)

(73)

(50)

(10)

Reported operating profit

(270)

57

227

399

Net Interest

(58)

(59)

(84)

(103)

Exceptionals

0

(6)

Profit Before Tax (norm)

 

89

331

452

566

Profit Before Tax (reported)

 

(328)

(8)

142

296

Reported tax

99

9

(28)

(59)

Profit After Tax (norm)

69

268

357

447

Profit After Tax (reported)

(229)

1

114

237

Minority interests

(5)

0

0

0

Discontinued operations

(80)

(1,020)

0

0

Net income (normalised)

64

268

357

447

Net income (reported)

(314)

(1,019)

114

237

Average Number of Shares Outstanding (m)

1,406

1,349

1,335

1,296

EPS - normalised (p)

 

4.1

19.5

26.8

34.5

EPS - normalised fully diluted (p)

 

4.1

19.1

26.8

34.4

EPS - basic reported (p)

 

(16.6)

(75.5)

8.5

18.3

Dividend (p)

2.3

5.0

6.7

9.3

Revenue growth (%)

8.5

16.6

15.6

11.4

Gross Margin (%)

14.3

35.0

36.0

37.0

EBITDA Margin (%)

9.9

15.9

19.0

20.8

Normalised Operating Margin

5.0

11.6

14.6

16.6

BALANCE SHEET

Fixed Assets

11,114

5,611

5,400

5,191

Intangible Assets

6,882

3,397

3,137

2,877

Tangible Assets

2,599

777

826

877

Investments & other

1,633

1,437

1,437

1,437

Current Assets

2,873

1,318

1,414

1,489

Stocks

1,025

510

550

581

Debtors

1,426

713

769

813

Cash & cash equivalents

355

58

58

58

Other

67

37

37

37

Current Liabilities

2,978

1,533

1,653

1,706

Creditors

2,347

1,179

1,271

1,344

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

1,056

Long term borrowings

1,433

576

1,286

1,180

Other long term liabilities

2,408

1,253

193

(124)

Net Assets

7,168

3,567

3,681

3,918

Minority interests

39

0

0

0

Shareholders' equity

7,129

3,567

3,681

3,918

CASH FLOW

Operating Cash Flow

292

532

699

839

Working capital

(148)

(146)

(98)

(88)

Exceptional & other

(83)

(159)

(305)

(135)

Tax

(8)

17

(85)

(107)

Net operating cash flow

53

244

210

510

Capex

(31)

(93)

(211)

(221)

Acquisitions/disposals

(7)

0

0

0

Net interest

(82)

(65)

(70)

(84)

Equity financing

0

(93)

(565)

0

Dividends

(77)

(81)

(74)

(98)

Other

Net Cash Flow

(144)

(88)

(710)

106

Opening net debt/(cash)

343

487

572

1,282

Closing net debt/(cash)

487

572

1,282

1,176

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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