Melrose Industries — The stars are aligned

Melrose Industries (LSE: MRO)

Last close As at 21/05/2024

GBP6.70

74.80 (12.57%)

Market capitalisation

GBP8,167m

More on this equity

Research: Industrials

Melrose Industries — The stars are aligned

Following the demerger of Dowlais automotive, Melrose Industries is a focused aerospace group with a retuned strategy, still with shareholder value at its core, to develop its capabilities long term as a focused entity. The flexion point in the aftermarket partnerships, benefits from the operational actions and the accelerating recovery in the aerospace market provide strong positive dynamics for Melrose. Profit is set to expand significantly, well beyond the pre-acquisition levels, fuelling a balance sheet capable of significant cash returns to shareholders.

David Larkam

Written by

David Larkam

Analyst, Industrials

Industrials

Melrose Industries

Capital market review

Aerospace & defence

23 May 2023

Price

479p

Market cap

£6,480m

Net debt pro-forma (£m) on demerger

484

Shares in issue

1,351m

Free float

98.7%

Code

MRO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

18.8

60.7

93.8

Rel (local)

20.6

64.0

86.9

52-week high/low

490p

200p

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

Analyst

David Larkam

+44 (0)20 3077 5700

Melrose IndustriesMelrose Industries is a research client of Edison Investment Research Limited

Following the demerger of Dowlais automotive, Melrose Industries is a focused aerospace group with a retuned strategy, still with shareholder value at its core, to develop its capabilities long term as a focused entity. The flexion point in the aftermarket partnerships, benefits from the operational actions and the accelerating recovery in the aerospace market provide strong positive dynamics for Melrose. Profit is set to expand significantly, well beyond the pre-acquisition levels, fuelling a balance sheet capable of significant cash returns to shareholders.

Year

end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/22

8,191

398

7.2

2.3

66.2

0.5

12/23e

3,400

264

15.4

3.9

31.0

0.8

12/24e

3,584

388

22.7

5.7

21.1

1.2

12/25e

4,034

616

36.0

9.0

13.3

1.9

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items. 2022 valuation not provided as it reflects pre-demerger numbers.

Guidance for significant profit growth

Management has provided granular guidance for the group. Operating profit is expected to double between 2023 and 2025 (and more than treble from 2022), led by the aftermarket partnerships, recovering build rates, the benefits of restructuring and a range of other management actions. Our analysis of the roadmap concurs with management guidance. Indeed, on cash flow our estimates suggest that returns at the top end of the annual 5–10% of market cap are eminently achievable.

Risk reward sharing partnerships are taking off

As a technology leading business and strategic partner, Melrose has been able to invest in the commercial success of civil engine programmes alongside providing manufactured key components. These risk reward sharing partnerships (RRSPs) require investment upfront, development can take 15 years, with the rewards coming when the programme becomes profitable and cash generative in the production phase, building through the later aftermarket phase. For Melrose the returns at this point are particularly attractive as the investment has been sunk, the components delivered to the original engine build and there is therefore limited associated cost. Seventeen of the 19 RRSPs are now in the cash-generative phase with significant ramp-up expected over the next decade, linked to engines already in service and boosted by a recovering aerospace market.

Valuation: RRSPs the key

Key to the valuation of Melrose is to capture the value of the RRSPs. The associated cash flows are growing rapidly and are therefore not captured in any short-term metrics. Hence, we have used a discounted cash flow for the RRSPs (valuation £5.3bn) along with a peer group analysis for the remainder of the engines operations and structures business (valuation £3.4bn). This provides an overall valuation of 608p a share, which will be diluted by c 20p a share if the full management pay-out is achieved in 2024.

Background

Melrose has successfully implemented its ‘buy, improve, sell’ strategy over the last 20 years and four major transactions. The last acquisition was the purchase of automotive and aerospace group GKN in 2018. The businesses were affected by COVID-19, in particular aerospace, but by 2022 the restructuring programmes were largely implemented, especially in the automotive activities. Melrose management is keenly focused on shareholder value and is pragmatic, hence, with the market not conducive to a disposal, it decided to demerge the automotive operations. This was completed with the listing of Dowlais in April 2023, leaving Melrose as an aerospace business. Subsequently, management has signalled a change in strategy, saying it ‘will not seek to do another acquisition of an unrelated industrial business or, in the near term, a material aerospace acquisition’, providing investors with clarity for a strategy as a focused, high-quality aerospace group and an end to ‘buy, improve, sell’. The direction will shift from Melrose corporate turnaround to development of aerospace’s long-term potential. Management held an in-depth capital markets event on 17 May, providing greater granularity on operations including significant forward guidance. This review looks to assess the key elements of the capital markets event, in particular the financial guidance, which includes profit more than trebling between 2022 and 2025.

Activity profile

The Aerospace business was developed by GKN through internal investment and acquisitions, most notably Volvo Aero in 2012 for £633m and Fokker Technologies in 2015 for €706m. The business manufactures a range of components in metallics and increasingly composite materials. Through its ‘design & build’ capabilities it is positioned as a strategic technology partner to the OEMs. Such a position provides greater returns and longer ‘life of programme’ contracts than ‘make to print’ component business. Participation in the Airbus ‘Wing of Tomorrow’ programme to develop the next generation of composite wing structures highlights the technological capabilities and elevated partnership position.

Exhibit 1: Product overview

Source: Melrose Industries

The business has c 70% exposure to civil aerospace and c 30% to defence, and is split into two divisions: engines and structures.

Exhibit 2: Divisional breakdown

Exhibit 3: End market exposure

Source: Melrose Industries

Source: Melrose Industries

Exhibit 2: Divisional breakdown

Source: Melrose Industries

Exhibit 3: End market exposure

Source: Melrose Industries

Engines

The Engines business manufactures a range of components such as cases, frames, fans and other structural components. These are generally in the static part of the engine and are therefore not a ‘wear part’, offering limited aftermarket potential. However, the cost and timescales for developing an engine often lead to a consortium approach. Key suppliers are invited to take a stake in the full life profitability and cash flows of an engine programme, reducing the financial cost and risk to the prime engine manufacturer. These RRSPs offer a key revenue source and are discussed in more detail in the following section.

Exhibit 4: Activity profile by sales

Exhibit 5: End market by sales

Source: Melrose Industries

Source: Melrose Industries

Exhibit 4: Activity profile by sales

Source: Melrose Industries

Exhibit 5: End market by sales

Source: Melrose Industries

Structures

The primary activity of the Structures business is the production of wing structures including winglets and empennage as well as other fuselage components. The business has capabilities in both metals and composites, the later highlighted by the position as a key partner and supplier on the A350 programme, the first fully composite wing. Electrical Wiring Interconnection Systems (EWIS) build electric network within the aircraft, a growing market as aircraft increasingly move to electronics as highlighted in ‘fly by wire’ systems. Other smaller activities include landing gear, specialist canopies and de-icing systems. The business also has a growing repair business with three centres globally.

Exhibit 6: Activity profile

Exhibit 7: End market profile

Source: Melrose

Source: Melrose

Exhibit 6: Activity profile

Source: Melrose

Exhibit 7: End market profile

Source: Melrose

Risk reward sharing partnerships

Overview

The RRSPs are a key part of the Engines division. They offer an investment in the economics of an engine programme to run alongside the supply agreement for physical components. Participants tend to be strategic partners capable of providing technical input in the design and development stage as well as a financial contribution. These arrangements offer long-term income from the more lucrative aftermarket, providing a significant uplift and increased longevity to the revenue stream from an engine programme given that the components supplied are predominantly ‘life of engine’ (ie limited to the initial new build phase). Melrose has a portfolio of 19 RRSPs on a range of civil aircraft.

Cash and profit profile

Each RRSP is structured differently; here we provide an overview of the financials for a typical arrangement. While the cash is relatively straight forward, IFRS 15 contract accounting along with the interaction between the components supplied and the RRSP provides significant complexity to profit recognition.

Partners subscribe to the RRSP through participation fees, generally cash but it can be through technology. This occurs through the development stage of the engine, often around 15 years. At the same time, Melrose Aerospace invests in its own general development and production capital required to supply components to the engine. As the engine enters production, components are supplied and cash received. Pricing reflects a ‘should cost’ which is determined within the business model of the engine programme, reflecting anticipated profitability of the programme. The engine programme moves into cash positive territory in the build phase, increasing as the installed base and hence the aftermarket becomes established. The RRSP partners cash follows a similar profile. Key is the aftermarket when the ‘portfolio’ of engines provides a long tail, c 30 years, of cash to the RRSP ‘investors’ depending on the success of the engine.

Profit recognition is more complex due to the requirements of IFRS 15 contract accounting. The component parts business profit recognition is generally akin to a standard commercial programme, hence profit is dependent on production costs relative to ‘should cost’. However, there are a number of contract accounting rules to be applied, often requiring significant forward assumptions. One of particular note reflects that the delivery of a component is a pre-requisite for the engine to be built and the RRSP to make a profit on its aftermarket business. Given that Melrose has fulfilled its performance commitments on delivery of the part, reflecting that its parts are ‘life of engine’, ie do not participate in the aftermarket, there is a requirement to book a proportion of the anticipated future profit at this point. The extent of this can be seen in revenue terms in the ‘unbilled work done’, which stood at £450m at the 2022 year end (see note 17 in the Melrose report and accounts). This unwinds as the RRSP cash is received. Accounting for the RRSP, the initial investment is capitalised (no P&L charge) and then amortised as the income from RRSP aftermarket materialises. The income from the RRSP aftermarket is effectively a dividend stream so revenue equates broadly to cash. There is an associate cost from the amortisation charge and the unwind of the profit within the ‘unbilled work done’, explaining why the profit recorded is less than cash, although, with minimal cost of goods etc, margin is particularly high.

Portfolio and forecasts

Seventeen of the 19 RRSPs are in the cash-generative phase, Exhibit 8, and the portfolio has good market penetration and spread, with RRSPs on 75% of global narrowbody/regional flight hours and on 70% of global widebody flight hours. The relative predictability of flying hours and the prescriptive maintenance requirements provide a solid platform to forecast the cash and profits from the RRSPs. Exhibit 9 provides Melrose’s cash expectations.

Exhibit 8: RRSP profile

Exhibit 9: RRSP cash expectations (£m)

Source: Melrose Industries

Source: Melrose Industries. Note: ¹ Pre-tax.

Exhibit 8: RRSP profile

Source: Melrose Industries

Exhibit 9: RRSP cash expectations (£m)

Source: Melrose Industries. Note: ¹ Pre-tax.

Profitability expectations

Management has provided detailed guidance for the next three years, and the combined aerospace numbers are provided in Exhibit 10. These show significant improvement on 2022 results and on pre-Melrose ownership 2017 underlying results. Note that 2023 is likely to be the first year that revenues are similar to 2017, adjusting for disposals and exits, as the market recovers from the COVID-19 downturn. This section looks to assess the roadmap to delivering these targets.

Exhibit 10: Management guidance

2017

2022

2023

2025

Sales (£m)

3.6

3.0

3.4

4.0

Operating Profit (£m)

294

186

350

700

EBITDA (£m)

447

330

505

870

Operating margin

8.1%

6.3%

10-11%

17-18%

EBITDA margin

12.3%

11.2%

15%

22%

Source: Melrose Industries. Note:

Below we look at the divisions in more detail.

Engines

Exhibit 11 and 12 show management guidance and profit bridge for the Engines business.

Exhibit 11: Management guidance for Engines

2023

2025

Sales (£m)

1,300

1,800

Operating profit (£m)

290

500

EBITDA (£m)

350

580

Source: Melrose Industries

Exhibit 12: Management profit bridge for Engines

Source: Melrose

We have created our own profit bridge using peer returns and our industry knowledge to stress test management guidance. Our assumptions are outlined in Exhibit 13. The key driver is the growth in the RRSPs aftermarket combined with the high margins, which we have assumed at 90%. Original equipment component revenue growth is extracted from the stated targets of the airframe primes (see Appendix 1), although we have assumed lower original equipment (OE) revenue growth to the RRSPs due to the lack of exposuire on the LEAP engine programme. We have factored in broadly static margins, pre restructuring benefits, which should prove conservative given volume growth. Restructuring includes a reduction in sites from 12 to nine along with investment in automation and general operational improvements. Overall, our analysis suggests that the change in mix due to the growth from the RRSP aftermarket increases margins in line with management guidance.

Exhibit 13: Edison key assumptions for Engines

(£m)

2023e

Annual growth

2025e

Revenue

RRSPs - aftermarket

175

40%

343

RRSPs OE

540

10%

653

Government partnerships

130

8%

152

Repairs

130

35%

237

Original equipment

325

12%

408

Total Engines

1,300

1,793

Operating margin (%)

RRSPs - aftermarket

90%

90%

RRSPs OE

10%

10%

Government partnerships

10%

10%

Repairs

13%

10%

Original equipment

15%

15%

Total Engines

22%

28%

Operating profit

RRSPs - aftermarket

158

309

RRSPs OE

54

65

Government partnerships

13

15

Repairs

17

24

Original equipment

49

61

Restructuring benefits

25

Total Engines

290

499

Source: Edison Investment Research

Structures

Exhibit 14 and 15 show management guidance and profit bridge for the Structures business.

Exhibit 14: Management guidance for Structures

2023

2025

Sales (£m)

2,100

2,200

Operating profit (£m)

60

200

EBITDA (£m)

155

290

Source: Melrose Industries

Exhibit 15: Management profit bridge for Structures

Source: Melrose

Again, we have created our own profit bridge using peer returns and our industry knowledge to stress test management guidance. Our assumptions and profit bridge are set out in Exhibit 16. Growth in civil reflects original equipment supplier plans as per the Structures business. Defence reflects US Department of Defense (DoD) budget growth forecasts. Defence has been a key area of difficulty, which is being addressed with additional actions including exit of £150m of business and repricing of c 70% of the ongoing business for inflation pass throughs. Restructuring activities including a 40% reduction in the footprint with 40 facilities cut to 24 along with a focus on quality to reduce rework and scrap, these actions are expected to generate significant improvements by 2025. Restructuring savings of £30m have been factored in. Therefore, the key to achieving management forecasts is likely to be drop through from additional volume as end markets recover.

Exhibit 16: Edison key assumptions for Structures

(£m)

2023

Annual growth

2025

Revenue

Narrowbody

525

12%

659

Business Jets

525

5%

579

Widebody

420

12%

527

Defence

630

3%

668

Contracts exited

(150)

Structures sales

2,100

2,283

Profit

2023 EBIT

60

60

Civil growth at 35% drop through

84

Defence repricing

32

Restructuring/operational efficiencies

30

Exited business

10

Structures profit

60

216

Structures margin

3%

9%

Source: Edison Investment Research

Summary

A key element of Melrose’s ‘buy, improve, sell’ strategy has been the ‘improve’ phase. Melrose has set out margin expectation of 10–11% in 2023 and 17–18% in 2025, a significant uplift on the underlying 8.0% reported in 2017, the last year before Melrose purchased the business, and even the 10.2% in 2016 before significant operational issues surfaced. Exhibit 17 highlights the group’s track record, with average 6 percentage point increase in margin achieved under Melrose’s ownership. This is below the near 10% management is pointing to. However, we estimate that c 2.5pp of this improvement comes from the enhanced RRSPs mix, suggesting an underlying operational improvement requirement of c 7pp, which is more in line with management’s previous achievements. Combined with our roadmap analysis, this provides confidence that management guidance should be attainable, especially if the aerospace market recovery continues to accelerate.

Exhibit 17: Melrose’s margin improvement record

Entry

Exit

Delta

McKechnie

18%

24%

+6pp

Dynacast

11%

16%

+5pp

FKI

10%

15%

+5pp

Elster

13%

22%

+9pp

Nortek

9%

16%

+7pp

Source: Melrose Industries

Cash generation and deployment

Management highlighted significant expectations for improved cash flow and potential for additional capital returns, in addition to ordinary dividends. Exhibit 18 summarises our cash flow expectations (full details in Exhibit 26) and supports management’s projections for 12% unlevered, untaxed cash margin by 2025. Note that the cash from the RRSPs aftermarket requires no investment or working capital, significantly enhancing cash generation. Our analysis also suggests that, in the absence of additional returns to shareholders, the group will be in a net cash position by the end of 2026.

Management also stated that, through a combination of levering the balance sheet (up to 2.5x EBITDA) and cash generation, it would be able to buy back 5–10% of its market capital each year from 2024. Our analysis suggest that this could be on the conservative side.

Exhibit 18: Cash metrics and cash return potential

2023e

2024e

2025e

2026e

Operating cash margin

0%

6%

13%

15%

Operating cash conversion

2%

50%

76%

86%

Net debt/EBITDA (x)

1.1

0.8

0.3

N/A

Distribution potential

 

Cash from leveraging to 2.5x EBITDA (£m)

 

591

562

278

Net cash generation from operations (£m)

 

30

210

280

Total cash to return to shareholders (£m)

 

622

772

558

Percentage of current market capitalisation

 

10%

12%

9%

Percentage of reducing market capitalisation

 

9%

13%

11%

Source: Edison Investment Research

Valuation

Key to the overall valuation of Melrose is appreciating the value within the RRSP portfolio. The split provided between engines and structures permits the two activities to be valued against their different peer groups. However, the peers for the engines business, MTU and Safran, are expected to report margins of 12–13% in 2023 rising to 13–16% in 2025, around half the level of Melrose engines business: 22% rising to 28%. Hence such a comparison is unlikely to capture the true value. To reflect this and the level of granularity provided, we value the RRSPs separately using a discounted cash flow and the conventional operations (including the remainder of the engines activities) against a peer group of aerospace companies.

Engine RRSPs

Exhibit 19 provides a summary of our discounted cash flow or net present value (NPV) of the RRSPs’ cash flows relative to discount rates. Our 7.6% WACC is consistent with leverage of 2.5x EBITDA, which management sees as appropriate for the group and provides a valuation of £5.3bn. This is not dissimilar to management’s £5.5bn valuation using a ‘midpoint’ discount rate of 7.5%. Note this excludes any cash investment and returns on future RRSPs.

Exhibit 19: RRSPs NPV valuation

 

Debt

WACC

Melrose cost of equity

Discount rate (%)

5.5

7.6

9.2

NPV (£bn)

7.2

5.3

4.2

Source: Edison Investment Research

Aerospace, ex RRSPs

Exhibit 20 provides a peer valuation for the group’s non RRSP activities using a quoted peer group of relevant aerospace component suppliers. Note that the margins that the Melrose businesses are expected to generate are higher than the peer average.

Exhibit 20: Aerospace ex RRSPs peer valuation

Peers

 Market cap

EV/EBIT (x)

EV/EBITDA (x)

EBIT margin (x)

£m

2023

2024

2025

2023

2024

2025

2023

2024

2025

Arconic

2,314

9.9

8.2

7.7

6.2

5.5

5.0

5.0%

5.4%

5.6%

Magellan

265

8.6

6.1

6.2

6.6

5.1

4.2

6.8%

9.1%

8.1%

MTU

10,555

16.4

14.6

12.6

11.6

10.4

9.5

12.3%

12.4%

13.0%

Safran

51,340

19.6

15.7

13.1

13.9

11.7

10.1

13.4%

14.9%

16.2%

Senior

726

19.7

14.0

10.9

9.1

7.7

6.5

4.8%

6.2%

7.4%

Spirit

2,016

59.9

13.0

6.9

10.6

6.2

4.7

1.3%

6.1%

8.3%

Triumph

558

14.2

12.6

10.5

10.1

9.9

8.6

10.9%

11.7%

13.0%

Average

16.4

12.0

9.7

9.7

8.1

6.9

7.8%

9.4%

10.2%

Aerospace ex RRSPs implied valuation (£m)

Aerospace ex RRSPs (EBIT/EBITDA, £m)

192

240

390

342

400

560

6.0%

7.2%

10.6%

Aerospace ex RRSPs valuation (£m)

3,153

2,885

3,787

3,325

3,229

3,887

Source: Refinitiv (16 May 2023)

Overall valuation

Combining these two valuations provides an overall valuation for the group. Note that the valuation does not take into account the management incentive plan, which matures in May 2024. We estimate that full pay-out would reduce the valuation by c 20p share.

Exhibit 21: Melrose combined valuation

£m

Aerospace ex RRSPs average of EV/EBIT and EV/EBITDA valuations (from Exhibit 20)

3393

RRSPs DCF valuation (from Exhibit 19)

5300

Melrose net debt on demerger

(484)

Melrose equity valuation

8209

Number of shares in issue (m)

1351

Value per Melrose share (p)

608

Aerospace ex RRSPs average of EV/EBIT and EV/EBITDA valuations (from Exhibit 20)

RRSPs DCF valuation (from Exhibit 19)

Melrose net debt on demerger

Melrose equity valuation

Number of shares in issue (m)

Value per Melrose share (p)

£m

3393

5300

(484)

8209

1351

608

Source: Edison Investment Research

Financials

The following forecasts adopt guidance provided by Melrose adjusted for the minor changes in our assumption analysis, explained earlier in the document.

Exhibit 22: P&L

Year to 31 December (£m)

2022

2023e

2024e

2025e

Organic growth

Engines

16.0%

18.0%

Structures

6.0%

8.0%

Group organic growth

8.5%

15.0%

5.4%

12.5%

Turnover:

Engines

1,300

1,508

1,791

Structures

2,100

2,076

2,242

Aerospace

2,957

3,400

3,584

4,034

Dowlais operations

5,234

Revenue

8,191

3,400

3,584

4,034

Operating margin

Engines

22.3%

24.5%

28.0%

Structures

2.9%

5.0%

9.0%

Aerospace

6.3%

10.3%

13.2%

17.3%

Dowlais operations

6.6%

Group operating margin

6.0%

9.4%

12.5%

16.7%

Operating profit

Engines

290

369

499

Structures

60

104

201

Aerospace

186

350

473

699

Dowlais operations

346

Central costs

(38)

(30)

(25)

(26)

Group operating profit

494

320

448

673

Intangibles amortisation

(458)

(300)

(300)

(300)

Exceptionals

Release of fair value items

26

Exchange adjustments

(87)

Reorganisation costs

(144)

(130)

(50)

(10)

Other

(53)

(70)

EBIT (reported)

(222)

(180)

98

363

Financing charges

(96)

(56)

(60)

(57)

Exceptional financing charges

25

PBT reported

(293)

(236)

38

306

PBT before exceptionals

398

264

388

616

Tax rate underlying

22%

21%

21%

21%

EPS Adjusted (p)

7.2

15.4

22.7

36.0

EPS Adjusted fully diluted (p)

7.2

15.4

22.7

36.0

Average shares

4,218

1,351

1,351

1,351

DPS (p)

2.3

3.9

5.7

9.0

Source: Melrose Industries accounts, Edison Investment Research

Exhibit 23: Cash flow

Year to 31 December (£m)

2022

2023e

2024e

2025e

Operating profit (pre exc & g/w)

494

320

448

673

Share of profit from equity acc investments

(78)

Depreciation & amortisation

356

155

162

170

EBITDA

772

475

610

843

Net change in WC

(178)

(78)

(50)

(45)

Charge for share schemes

15

Restructuring

(195)

(130)

(100)

(50)

Pension etc

(59)

(51)

(20)

(20)

Other adjusting items

(15)

(20)

(20)

(10)

Operating cash flow

340

196

420

718

Returns & servicing of finance

(36)

(50)

(54)

(52)

Total tax paid

(80)

(61)

(81)

(129)

Net CAPEX

(232)

(190)

(194)

(204)

Free cash flow

(8)

(104)

90

333

Acquisitions & disposals

500

834

0

0

Equity dividends paid

(77)

(91)

(60)

(92)

Shares issued / (repurchased)

(504)

Net cash flow

(89)

639

30

241

Exchange rate differences

(109)

Other non-cash

(27)

Net cash/(debt) b/fwd

(943)

(1,168)

(529)

(499)

Movement in net debt

(225)

639

30

241

Net cash / (debt)

(1,168)

(529)

(499)

(258)

Finance Leases (FRS16)

(376)

(220)

(220)

(220)

Total Net Cash/(debt)

(1,544)

(749)

(719)

(478)

Source: Melrose Industries accounts, Edison Investment Research


Appendix 1: Airbus and Boeing delivery expectations

The following tables highlight the past deliveries, back to pre-COVID peak numbers, and Edison’s forward expectations based on company commentary.

Exhibit 24: Airbus deliveries

Deliveries

Growth

A220

A320

A330

A350

A380

Total

Narrowbody

Widebody

2018

20

626

46

93

12

797

16%

(6%)

2019

48

642

53

112

8

863

7%

15%

2020

38

446

19

59

4

566

(30%)

(53%)

2021

50

483

18

55

5

611

10%

(5%)

2022

53

516

32

60

661

7%

18%

2023e

55

560

40

65

720

8%

14%

2024e

58

680

45

75

858

20%

14%

2025e

60

750

50

90

950

10%

17%

2026e

62

800

55

105

1022

6%

14%

Source: Airbus, Edison Investment Research

Exhibit 25: Boeing deliveries

Deliveries

Growth

737

747

767

777

787

Total

Narrowbody

Widebody

2018

580

6

27

48

145

806

10%

(3%)

2019

115

7

47

46

161

376

(80%)

15%

2020

43

5

30

26

53

157

(63%)

(56%)

2021

263

7

32

24

14

340

512%

(32%)

2022

387

5

33

24

31

480

47%

21%

2023e

425

33

24

70

552

10%

37%

2024e

480

33

24

85

622

13%

12%

2025e

520

33

24

105

682

8%

14%

2026e

600

33

24

120

777

15%

9%

Source: Boeing, Edison Investment Research


Exhibit 26: Financial summary

£m

2022

2023e

2024e

2025e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

8,191

3,400

3,584

4,034

Cost of Sales

(7,018)

(2,210)

(2,294)

(2,541)

Gross Profit

1,173

1,190

1,290

1,492

EBITDA

 

772

475

610

843

Operating profit (before amort. and excepts.)

494

320

448

673

Amortisation of acquired intangibles

(458)

(300)

(300)

(300)

Exceptionals

(258)

(200)

(50)

(10)

Reported operating profit

(222)

(180)

98

363

Net Interest

(96)

(56)

(60)

(57)

Exceptionals

25

Profit Before Tax (norm)

 

398

264

388

616

Profit Before Tax (reported)

 

(293)

(236)

38

306

Reported tax

84

0

0

0

Profit After Tax (norm)

310

209

306

486

Profit After Tax (reported)

(209)

(236)

38

306

Minority interests

(5)

0

0

0

Discontinued operations

(80)

0

0

0

Net income (normalised)

305

209

306

486

Net income (reported)

(294)

(236)

38

306

Average Number of Shares Outstanding (m)

4,218

1,351

1,351

1,351

EPS - normalised (p)

 

7.2

15.4

22.7

36.0

EPS - normalised fully diluted (p)

 

7.2

15.4

22.7

36.0

EPS - basic reported (p)

 

(5.1)

(17.5)

2.8

22.6

Dividend (p)

2.33

3.86

5.67

9.00

Revenue growth (%)

8.5

15.0

5.4

12.5

Gross Margin (%)

14.3

35.0

36.0

37.0

EBITDA Margin (%)

9.4

14.0

17.0

20.9

Normalised Operating Margin

6.0

9.4

12.5

16.7

BALANCE SHEET

Fixed Assets

 

11,114

5,391

5,123

4,857

Intangible Assets

6,882

3,498

3,198

2,898

Tangible Assets

2,599

821

853

887

Investments & other

1,633

1,072

1,072

1,072

Current Assets

 

2,873

1,522

1,560

1,651

Stocks

1,025

566

582

618

Debtors

1,426

847

870

925

Cash & cash equivalents

355

85

85

85

Other

67

23

23

23

Current Liabilities

 

2,978

1,562

1,576

1,636

Creditors

2,347

1,246

1,280

1,360

Tax and social security

141

32

32

32

Short term borrowings

63

63

63

63

Other

427

221

201

181

Long Term Liabilities

 

3,841

1,700

1,419

877

Long term borrowings

1,433

551

521

280

Other long term liabilities

2,408

1,148

898

597

Net Assets

 

7,168

3,651

3,689

3,995

Minority interests

39

0

0

0

Shareholders' equity

 

7,129

3,651

3,689

3,995

CASH FLOW

Operating Cash Flow

772

475

610

843

Working capital

(178)

(78)

(50)

(45)

Exceptional & other

(254)

(201)

(140)

(80)

Tax

(80)

(61)

(81)

(129)

Net operating cash flow

 

260

135

339

589

Capex

(232)

(190)

(194)

(204)

Acquisitions/disposals

500

834

0

0

Net interest

(36)

(50)

(54)

(52)

Equity financing

(504)

0

0

0

Dividends

(77)

(91)

(60)

(92)

Net Cash Flow

(89)

639

30

241

Opening net debt/(cash)

 

943

1,168

529

499

FX

(109)

0

0

0

Other non-cash movements

(27)

0

0

0

Closing net debt/(cash)

 

1,168

529

499

258

Source: Melrose Industries accounts, 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 2023 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 2023 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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