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Research: Industrials
Melrose Industries’ results highlight that the Aerospace division is recovering ahead of previous management expectations. This should increase the attractions of the new Melrose group post demerger when it becomes a focused aerospace-orientated group. The other half of the demerger, automotive-orientated Dowlais, will offer recovery potential (10%+ margin targets) along with corporate activity expectations.
Melrose Industries |
Positive trajectory |
General Industrials |
2 March 2023 |
Share price performance
Business description
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Analyst
Melrose Industries is a research client of Edison Investment Research Limited |
Melrose Industries’ results highlight that the Aerospace division is recovering ahead of previous management expectations. This should increase the attractions of the new Melrose group post demerger when it becomes a focused aerospace-orientated group. The other half of the demerger, automotive-orientated Dowlais, will offer recovery potential (10%+ margin targets) along with corporate activity expectations.
Year end |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/21 |
7,263 |
194 |
3.1 |
1.75 |
49.7 |
1.1 |
12/22 |
8,191 |
384 |
7.0 |
2.33 |
22.0 |
1.5 |
12/23e |
8,912 |
547 |
10.3 |
2.75 |
15.0 |
1.8 |
12/24e |
9,559 |
722 |
13.6 |
3.75 |
11.3 |
2.4 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
FY22 results in summary
Underlying PBT of £384m was up from £194m in FY21, while EPS of 7.0p increased 126% y-o-y and was ahead of our forecast of 5.6p. Management declared a second interim dividend of 1.5p, up 50% y-o-y. Aerospace is recovering strongly with organic growth of 11% which, with restructuring benefits, enabled margins to increase from 4.4% to 6.3%. Restructuring is progressing to plan, with all projects to be substantially complete by the end of 2023. The outlook is positive as air travel continues to recover, combined with strong positions, particularly on the current highest-volume civil airframe, the A320. Automotive organic growth was 9% which, with inflation recovery delivered as expected in H2, enabled margins to rise from 4.6% to 5.9%. Bookings were strong at more than £5bn with over 40% EV or hybrid EV. Powder Metallurgy sales were flat with volumes down, yet margins inched up from 9.3% to 9.4% as increases in material and energy costs were passed through. Free cash outflow was £8m, reflecting investment in working capital of £178m to support top-line growth, restructuring spend of £195m and additional pension costs of £59m. Net debt increased from £950m to £1.1bn.
Outlook and forecast changes
Management expects Aerospace to be ‘significantly stronger’ than previously anticipated. Hence, we have increased our growth expectation from 10% to 15% for 2023, with associated drop-through benefits. Automotive market growth is expected to be 3%, limiting operational gearing and hence the rate of margin progression. Similar trends are expected in Powder Metallurgy. Lower net debt will assist in the interest line. For FY23, we forecast PBT of £547m (vs £466m previously), EPS of 10.3p (vs 8.8p previously) and for FY24 we forecast PBT of £722m (vs £690m previously) and EPS of 13.6p (vs 12.6p previously).
Valuation: Discount remains despite improving mix
Our previous note on the proposed demerger provided a listed valuation of 200p and 246p on a sum-of-the-parts basis, assuming disposal premiums are achieved. The improving mix, with a higher proportion of Aerospace profits, is arguably positive, although our valuation already discounted achieving management target margins in 2025, hence we are not changing our valuation at present.
Exhibit 1: Financial summary
£m |
2021 |
2022 |
2023e |
2024e |
||
Year to December |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||
Revenue |
|
|
7,263 |
8,191 |
8,912 |
9,559 |
Cost of Sales |
(6,195) |
(7,018) |
(7,397) |
(7,886) |
||
Gross Profit |
1,068 |
1,173 |
1,515 |
1,673 |
||
EBITDA |
|
|
676 |
808 |
963 |
1,150 |
Operating profit (before amort. and excepts.) |
|
|
317 |
480 |
643 |
825 |
Amortisation of acquired intangibles |
(452) |
(458) |
(458) |
(458) |
||
Exceptionals |
(358) |
(258) |
(150) |
(100) |
||
Reported operating profit |
(493) |
(236) |
35 |
267 |
||
Net Interest |
(123) |
(96) |
(97) |
(103) |
||
Exceptionals |
(44) |
25 |
||||
Profit Before Tax (norm) |
|
|
194 |
384 |
547 |
722 |
Profit Before Tax (reported) |
|
|
(660) |
(307) |
(61) |
164 |
Reported tax |
180 |
84 |
0 |
0 |
||
Profit After Tax (norm) |
151 |
299 |
421 |
556 |
||
Profit After Tax (reported) |
(480) |
(223) |
(61) |
164 |
||
Minority interests |
(4) |
(5) |
(5) |
(5) |
||
Discontinued operations |
1,317 |
(80) |
0 |
0 |
||
Net income (normalised) |
147 |
294 |
416 |
551 |
||
Net income (reported) |
833 |
(308) |
(66) |
159 |
||
Average Number of Shares Outstanding (m) |
4,695 |
4,218 |
4,054 |
4,054 |
||
EPS - normalised (p) |
|
|
3.1 |
7.0 |
10.3 |
13.6 |
EPS - normalised fully diluted (p) |
|
|
3.1 |
7.0 |
10.3 |
13.6 |
EPS - basic reported (p) |
|
|
(10.3) |
(5.4) |
(1.6) |
3.9 |
Dividend (p) |
1.75 |
2.33 |
2.75 |
3.75 |
||
Revenue growth (%) |
2.0 |
8.5 |
8.6 |
7.1 |
||
Gross Margin (%) |
14.7 |
14.3 |
17.0 |
17.5 |
||
EBITDA Margin (%) |
9.3 |
9.9 |
10.8 |
12.0 |
||
Normalised Operating Margin |
4.4 |
5.9 |
7.2 |
8.6 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
11,438 |
11,114 |
10,745 |
10,377 |
Intangible Assets |
7,437 |
6,882 |
6,424 |
5,966 |
||
Tangible Assets |
2,528 |
2,599 |
2,688 |
2,778 |
||
Investments & other |
1,473 |
1,633 |
1,633 |
1,633 |
||
Current Assets |
|
|
2,584 |
2,873 |
2,979 |
3,070 |
Stocks |
893 |
1,025 |
1,069 |
1,107 |
||
Debtors |
1,184 |
1,426 |
1,487 |
1,541 |
||
Cash & cash equivalents |
473 |
355 |
355 |
355 |
||
Other |
34 |
67 |
67 |
67 |
||
Current Liabilities |
|
|
3,124 |
2,978 |
3,013 |
3,081 |
Creditors |
2,051 |
2,347 |
2,448 |
2,536 |
||
Tax and social security |
142 |
141 |
141 |
141 |
||
Short term borrowings |
462 |
63 |
63 |
63 |
||
Other |
469 |
427 |
361 |
341 |
||
Long Term Liabilities |
|
|
3,358 |
3,841 |
3,709 |
3,331 |
Long term borrowings |
903 |
1,433 |
1,503 |
1,309 |
||
Other long term liabilities |
2,455 |
2,408 |
2,206 |
2,022 |
||
Net Assets |
|
|
7,540 |
7,168 |
7,002 |
7,036 |
Minority interests |
33 |
39 |
39 |
39 |
||
Shareholders' equity |
|
|
7,507 |
7,129 |
6,963 |
6,997 |
CASH FLOW |
||||||
Operating Cash Flow |
676 |
808 |
963 |
1,150 |
||
Working capital |
62 |
(178) |
(72) |
(65) |
||
Exceptional & other |
(321) |
(254) |
(210) |
(130) |
||
Tax |
(65) |
(80) |
(113) |
(149) |
||
Net operating cash flow |
|
|
352 |
296 |
568 |
806 |
Capex |
(225) |
(232) |
(429) |
(440) |
||
Acquisitions/disposals |
2,693 |
500 |
(70) |
0 |
||
Net interest |
(137) |
(36) |
(41) |
(47) |
||
Equity financing |
(730) |
(504) |
0 |
0 |
||
Dividends |
(69) |
(77) |
(100) |
(125) |
||
Other |
||||||
Net Cash Flow |
1,884 |
(53) |
(72) |
194 |
||
Opening net debt/(cash) |
|
|
2,847 |
950 |
1,139 |
1,211 |
FX |
40 |
(109) |
0 |
0 |
||
Other non-cash movements |
(27) |
(27) |
0 |
0 |
||
Closing net debt/(cash) |
|
|
950 |
1,139 |
1,211 |
1,017 |
Source: Company data, Edison Investment Research
|
|
Research: Industrials
Carr’s Group has issued a detailed trading update giving some preliminary financial metrics on FY22 performance. These show both continuing divisions (Speciality Agriculture and Engineering) beating our EBIT estimates, following a strong finish to the year. The shares remain suspended until management finishes the final stages of the audit process, which it believes are ‘essentially complete’. Our note is based on the initial information in the trading update. We will publish a follow-on update once the full results are announced.
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