Melrose Industries PLC (LON:MRON) specialises in buying underperforming companies, typically in the engineering sector, revamps them and then offloads the assets.
Their own motto is “buy, improve, sell” – as seen on their website. It is a business strategy that depends on carefully selecting targeted companies, arranging the financing to fund the transaction, restructuring the group and then finding a suitor to purchase the enterprise.
The pandemic caused havoc to the global economy and it brought about major uncertainty for the aviation industry. Keep in mind that in March 2019, Melrose acquired GKN (LON:GKN), an aerospace group for over £8 billion – that left the buyout group very exposed. When the health crisis set-in, the dividend was cancelled as a way of conserving cash and this proved to be successful. Over the summer the firm secured more favourable lending conditions for it £3.2 billion credit facility, so it is more than comfortable from a liquidity point of view.
This morning the Melrose Industries share price will be in focus on the back of the reasonably upbeat trading update. The board of directors confirmed the company is trading at the top end of expectations for 2020, but it was a little cautious too in light of the economic environment. Melrose has been encouraged by the fast recovery in the automotive industry. Nortek Air Management – the ventilation and air conditioning business - is performing well. The aerospace unit continues to face challenges but management commented that business is stable Melrose announced that group net debt will fall this year despite significant spending on restructuring, and that should take some of the pressure off from a liquidity perspective.
In light of the progress made on the Covid-19 vaccine front, there has been a big lift in the share price of companies like Rolls-Royce (LON:RR) and airlines such as EasyJet (LON:EZJ). Should further progress be made in that area, then the Melrose Industries share price should be in for a boost too in light of its GKN investment.
In September, the group delivered dreadful first half numbers, which wasn’t a surprise given the environment. Revenue dropped by 25.8% to £4.3 billion, while the adjusted operating profit tumbled by almost 90% to £56 million. Melrose revealed asset write-downs of £179 million, of which £133 million were from the aerospace sector. Despite the fact that the figures were ugly, management said that trading was better than expected.
Melrose Industries share price rallied at the start of 2020 and in February it hit its highest level since June 2017. Between February and April the stock dropped by over 70% and it has made somewhat of a recovery in recent months. Melrose Industries share price recently hit an eight month high and if the bullish trend continues, it might target the 180p zone. A pullback from here might encounter support at 140p.
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