ii view: GKN aerospace helps Melrose exceed forecasts

Melrose's purchase of engineer GKN bears fruit, and shareholders are rewarded with 10% dividend hike.

Half-year results  

• Revenue up 100% to £5.7 billion
• Adjusted operating profit up 90% to £539 million
• Interim dividend up 10% to 1.7p per share

Chairman Justin Dowley said:

"These results show the initial fruits of the 'improve' stage of Melrose's ownership of GKN and, with the overall GKN margin increasing positively, we are excited about what is possible.  The performance is in line with expectations and leverage is better than expected. At the same time, this has been a year of record investment in Aerospace technology and substantial eDrive development.  The Melrose board is confident that our businesses will deliver significant upside for shareholders."

ii round-up:

Melrose Industries (LSE:MRO) listed on the UK's Alternative Investment Market (AIM) back in 2003. 

Today it is a broad-based engineering and manufacturing business with interests ranging across a wide spectrum, including aerospace and automotive. 

It pursues a strategy of buying manufacturing businesses, improving their performance via a mixture of investment and changed management focus and then selling them and returning the proceeds to shareholders.

Early last year it acquired one of the UK's oldest engineering businesses, GKN, for a little over £8 billion. GKN employs nearly 60,000 people and its customers include Volkswagen (XETRA:VOW), Bayerische Motoren Werke (XETRA:BMW) and Volvo. 

Half-year results saw Melrose report adjusted operating profit ahead of analyst forecasts. 

A 7% gain in sales for the former GKN Aerospace business led the way. Divisional profit rose by 37%, aided by record investment and operational improvements. It is now the company's biggest profit driver. 

Against the backdrop of a global automotive downturn, the former GKN automotive business had maintained profitability well in the eyes of management, with overall auto sales down 7%.

Accompanying full-year guidance remained unchanged, with management confidence underlined by a 10% increase in the dividend payment. 

The share price rose over 6% in early UK stock market trading. 

ii view:

Melrose is a company which potentially polarises opinion and creates debate. Is it a "short-termist asset-stripper" as considered by some MPs during its often bitter battle to acquire GKN? Or is it a necessary force of capitalism as it restructures companies attempting to improve productivity and enhance shareholder value?

For investors, execution risk and even a potential change to a less business friendly UK government offer some grounds for caution. But the company's track record of successful acquisitions and value enhancing sales, including McKechnie/Dynacast and FKI, offer reassurance. As of 31 December 2018, it had returned £4.5 billion of cash to shareholders. A forward dividend yield of over 2.5% is also not to be overlooked in the current ultra-low interest rate environment. 

Positives: 

• Aerospace division benefiting from early initiatives
• A track record of previous acquisitions and value enhancing sales

Negatives:

• Its strategy can create conflict with governments and trade unions
• Automotive division battling a global downturn

The average rating of stock market analysts:

Strong buy