Currency in GBP
Last close As at 28/03/2023
GBP1.61
▲ 6.85 (4.44%)
Market capitalisation
GBP6,209m
Research: Industrials
Recent weakness in the share price (down 25% in Q122) reflects investors’ macro concerns. Melrose Industries’ value realisation occurs through disposing assets to vendors aware of the longer-term value. We expect disposals in 2022 (Ergotron and possibly GKN assets) to prove Melrose’s ‘buy, improve, sell’ model once more and support our valuation.
Melrose Industries |
Short-term trading versus long-term value creation |
Forecast update |
Industrials |
12 April 2022 |
Share price performance
Business description
Next events
Analyst
Melrose IndustriesMelrose is a research client of Edison Investment Research Limited |
Recent weakness in the share price (down 25% in Q122) reflects investors’ macro concerns. Melrose Industries’ value realisation occurs through disposing assets to vendors aware of the longer-term value. We expect disposals in 2022 (Ergotron and possibly GKN assets) to prove Melrose’s ‘buy, improve, sell’ model once more and support our valuation.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/20 |
7,723 |
(41) |
(0.6) |
0.75 |
N/A |
0.6 |
12/21 |
7,496 |
252 |
4.1 |
1.75 |
28.5 |
1.5 |
12/22e |
7,699 |
360 |
6.4 |
2.25 |
18.3 |
1.9 |
12/23e |
8,348 |
545 |
9.6 |
3.00 |
12.2 |
2.6 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Forecast update
Automotive markets had been expected to recover in 2022 as supply constraints receded. However, the Ukraine situation is putting additional pressure on supply chains, reducing forecasts to a flatter year in 2022. Hence, we have reduced our sales expectation for Melrose’s Automotive division by c £150m, which, with a 30% drop through, leads to a reduction of £45m in EBIT. We have made a similar adjustment to Powder Metallurgy automotive sales, affecting profits by c £10m. We have trimmed the Other Industrial division to reflect higher investment in the hydrogen storage business. Overall changes to FY22 forecasts are normalised PBT down to £360m from £405m (-11.1%), normalised EPS of 6.4p from 7.2p (-11.1%). Our changes to FY23 forecasts are PBT of £545m from £628m (-13.2%) and EPS 9.6p from 11.0p (-12.7%). While it is disappointing the automotive market remains depressed, it is worth noting that there is still significant pent-up auto demand given the market is still 15% below pre-pandemic peak levels and Melrose’s recovery momentum continues and margins are expected to expand by 130bp in 2022.
Valuation: Disposals to realise value
Key to Melrose’s ‘buy, improve, sell’ model is the final asset disposal when value is realised. Nortek Air Management & Control and Brush were sold in 2021 for a combined sum of c £2.5bn. The remaining Nortek asset, Ergotron, is soliciting offers that, given its US bias, are unlikely to be hindered by the current issues in Europe. Powder Metallurgy could also enter the disposal stage in 2022. While the market background is clearly less favourable than hoped for in automotive, we note recent auto deals Apollo/Tenneco for $7.1bn and Cummins/Meritor for $3.7bn. Our valuation remains 226p (see our initiation note published on 29 October 2021).
Exhibit 1: Financial summary
£m |
2019 |
2020 |
2021 |
2022e |
2023e |
|
Year to December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|
INCOME STATEMENT |
||||||
Revenue (ex Associates) |
|
11,592 |
7,723 |
7,496 |
7,699 |
8,348 |
Cost of Sales |
(8,732) |
(6,858) |
(6,394) |
(6,467) |
(6,929) |
|
Gross Profit |
2,860 |
865 |
1,102 |
1,232 |
1,419 |
|
EBITDA |
|
1,534 |
521 |
734 |
894 |
1,081 |
Operating profit (before amort. and excepts.) |
|
1,102 |
141 |
375 |
484 |
681 |
Amortisation of acquired intangibles |
(534) |
(472) |
(452) |
(452) |
(452) |
|
Exceptionals |
(250) |
(156) |
(374) |
(250) |
(200) |
|
Share-based payments |
||||||
Reported operating profit |
318 |
(487) |
(451) |
(218) |
29 |
|
Net Interest |
(213) |
(182) |
(123) |
(124) |
(136) |
|
Joint ventures & associates (post tax) |
0 |
0 |
0 |
0 |
0 |
|
Exceptionals |
||||||
Profit Before Tax (norm) |
|
889 |
(41) |
252 |
360 |
545 |
Profit Before Tax (reported) |
|
105 |
(669) |
(574) |
(342) |
(107) |
Reported tax |
(51) |
114 |
172 |
0 |
0 |
|
Profit After Tax (norm) |
699 |
(27) |
197 |
281 |
420 |
|
Profit After Tax (reported) |
54 |
(555) |
(402) |
(342) |
(107) |
|
Minority interests |
(9) |
(3) |
(4) |
(2) |
(2) |
|
Discontinued operations |
(106) |
32 |
1,283 |
0 |
0 |
|
Net income (normalised) |
690 |
(30) |
193 |
279 |
418 |
|
Net income (reported) |
(61) |
(526) |
877 |
(344) |
(109) |
|
Average Number of Shares Outstanding (m) |
4,858 |
4,858 |
4,695 |
4,372 |
4,372 |
|
EPS - normalised (p) |
|
14.3 |
(0.6) |
4.1 |
6.4 |
9.6 |
EPS - normalised fully diluted (p) |
|
14.3 |
(0.6) |
4.1 |
6.4 |
9.6 |
EPS - basic reported (p) |
|
(1.2) |
(11.0) |
18.7 |
(7.9) |
(2.5) |
Dividend (p) |
1.70 |
0.75 |
1.75 |
2.25 |
3.00 |
|
Revenue growth (%) |
(-1.2) |
(-20.0) |
2.0 |
2.4 |
8.4 |
|
Gross Margin (%) |
24.7 |
11.2 |
14.7 |
16.0 |
17.0 |
|
EBITDA Margin (%) |
13.2 |
6.7 |
9.8 |
11.6 |
13.0 |
|
Normalised Operating Margin |
9.5 |
1.8 |
5.0 |
6.3 |
8.2 |
|
BALANCE SHEET |
||||||
Fixed Assets |
|
14,322 |
13,515 |
11,438 |
11,126 |
10,824 |
Intangible Assets |
9,822 |
9,299 |
7,437 |
6,985 |
6,533 |
|
Tangible Assets |
3,432 |
3,133 |
2,528 |
2,668 |
2,818 |
|
Investments & other |
1,068 |
1,083 |
1,473 |
1,473 |
1,473 |
|
Current Assets |
|
3,918 |
3,165 |
2,584 |
2,609 |
2,697 |
Stocks |
1,332 |
1,126 |
893 |
904 |
942 |
|
Debtors |
1,970 |
1,658 |
1,184 |
1,198 |
1,249 |
|
Cash & cash equivalents |
512 |
311 |
473 |
473 |
473 |
|
Other |
104 |
70 |
34 |
34 |
34 |
|
Current Liabilities |
|
3,486 |
3,363 |
3,124 |
3,053 |
3,120 |
Creditors |
2,461 |
2,456 |
2,051 |
2,076 |
2,163 |
|
Tax and social security |
106 |
188 |
142 |
142 |
142 |
|
Short term borrowings |
284 |
165 |
462 |
462 |
462 |
|
Other |
635 |
554 |
469 |
373 |
353 |
|
Long Term Liabilities |
|
7,203 |
6,207 |
3,358 |
3,570 |
3,507 |
Long term borrowings |
3,464 |
2,926 |
903 |
1,145 |
1,185 |
|
Other long term liabilities |
3,739 |
3,281 |
2,455 |
2,425 |
2,322 |
|
Net Assets |
|
7,551 |
7,110 |
7,540 |
7,112 |
6,894 |
Minority interests |
26 |
29 |
33 |
33 |
33 |
|
Shareholders' equity |
|
7,525 |
7,081 |
7,507 |
7,079 |
6,861 |
CASH FLOW |
||||||
Operating Cash Flow |
1,534 |
521 |
734 |
894 |
1,081 |
|
Working capital |
58 |
371 |
62 |
(20) |
(65) |
|
Exceptional & other |
(519) |
(9) |
(321) |
(335) |
(250) |
|
Tax |
(117) |
(14) |
(65) |
(79) |
(125) |
|
Net operating cash flow |
|
956 |
869 |
410 |
460 |
641 |
Capex |
(495) |
(265) |
(225) |
(500) |
(500) |
|
Acquisitions/disposals |
119 |
(11) |
2,693 |
0 |
0 |
|
Net interest |
(120) |
(127) |
(137) |
(60) |
(72) |
|
Equity financing |
0 |
0 |
(730) |
0 |
0 |
|
Dividends |
(237) |
0 |
(69) |
(84) |
(109) |
|
Other |
||||||
Net Cash Flow |
223 |
466 |
1,942 |
(184) |
(40) |
|
Opening net debt/(cash) |
|
3,482 |
3,283 |
2,847 |
950 |
1,134 |
FX |
90 |
7 |
40 |
0 |
0 |
|
Other non-cash movements |
(114) |
(37) |
(85) |
0 |
0 |
|
Closing net debt/(cash) |
|
3,283 |
2,847 |
950 |
1,134 |
1,174 |
Source: Company accounts, Edison Investment Research
|
|
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