ii view: GKN drives profits leap at Melrose

A first full year of GKN ownership and progress is being made at the turnaround specialist.

Full-year results to 31 December 2019

• Adjusted revenue up 34% to £11.6 billion
• Adjusted operating profit up 35% to £1.1 billion
• Statutory pre-tax profit of £106 million, up from a loss of £542 million
• Final dividend up 11% to 3.4p per share – total 2019 dividend up 11%
• Group net debt down 6% to £3.28 billion

Guidance:

• Impact of coronavirus not fully known yet

Chairman Justin Dowley said:

"We are delighted with the Melrose performance in 2019 and the substantial value that is being unlocked. Notwithstanding any implications of the COVID-19 outbreak, the bedrock has now been built for the GKN businesses to attain results which were not previously achievable, and, in addition, the shareholder value built up in our longer held assets is closer to being realised. This shows, once more, that the Melrose model thrives by investing properly in businesses and giving management the entrepreneurial freedom to succeed. This is just the start of what is possible for GKN."

ii round-up:

Manufacturing business buyer and turnaround specialist Melrose Industries (LSE:MRO) reported profits ahead of analyst expectations in these latest results. 

Led by its performance improvement plan for previously acquired aerospace and automotive engineer GKN, profits excluding exceptional charges jumped by 35% to £1.1 billion. City forecasters had pencilled in a number nearer to £1 billion

Loss-making GKN contracts of over £600 million continue to be addressed, with record group-wide investment being made in areas such as technology and new product development. 

Sales for the former GKN aerospace business, whose customers include both Boeing (NYSE:BA) and Airbus (EURONEXT:AIR), rose by 7%, with restructuring helping the adjusted profit margin rise to 10.6% from 9.9%. Hiked global defence spending is expected to support performance going forward. 

A broad industry downturn and strike action at customer General Motors (NYSE:GM) left former GKN automotive sales down 6%, although profit margins had improved during the second half. 

As for the coronavirus, while its impact could not yet be fully gauged, only around 10% of group sales are made in China, of which only 5% are sold there. 

Advisers to explore strategic options for its data centre exposed Nortek Air business have now been appointed, while a strategy day for its automotive business is planned for October. 

The shares rose by more than 2% in morning 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 UK politicians as it previously battled 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 broader global economic concerns around the coronavirus and trade tensions 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. Today’s results appear to offer further long-term reassurance in Melrose’s ability to deliver. 

Positives: 

• Focused on performance improvement rather than end market growth
• 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