Interactive Investor

Insider: boardroom newcomers fill up on shares after big deal

28th June 2021 08:45

Graeme Evans from interactive investor

This company has made some fantastic transactions over the years, and directors are celebrating this one. There’s also buying at this exciting lithium miner.

Two new directors at Melrose Industries (LSE:MRO) have bought their first shares after the GKN owner revealed to shareholders the potential fruits of its “Buy, Improve, Sell” strategy.

The FTSE 100 company is to hand back 15p a share to shareholders, amounting to £730 million of the £2.62 billion proceeds from the disposal of its Nortek Air Management division.

The return of capital takes place at the end of August and may be followed by more next year should conditions in the key aerospace and automotive markets continue to improve.

The early signs are good for that second windfall after Melrose reported improved trading for its drive systems and powder metallurgy operations, alongside growing hopes that the start of a recovery for its aerospace arm is in sight.

There had been fears that a chunk of the Nortek proceeds might have to be diverted to prop up the pandemic-hit GKN, but Melrose said it had actually generated £500 million of free cash flow since buying the business in a controversial £8 billion takeover in 2018.

By selling the air management business to Madison Industries, it is on track to double returns on the wider Nortek acquisition made in 2016 as part of its “Buy, Improve, Sell” strategy.

Despite the positive trading guidance and ‘buy’ recommendations of several brokers, Melrose shares finished broadly unchanged over the week at 156p. However, its two newest boardroom recruits took the opportunity to buy the company's stock for the first time.

Heather Lawrence bought shares on Thursday worth £39,175 at a price of 156.7p, while Victoria Jarman did so at 158p for a purchase valued at £23,750.

Both joined as non-executive directors at the start of June, with Lawrence the current MD of a large European family office and Jarman a director at Entain (LSE:ENT) and Great Portland Estates (LSE:GPOR).

They have joined a company whose shares plunged from 244p at the start of pandemic to as low as 85p last summer, amid fears about the impact of the pandemic on the aerospace industry.

But JP Morgan Cazenove, which has a target price of 230p, said the GKN operations were proven to be fundamentally good assets that can fund themselves, even in challenging markets.

The bank said there was now increased confidence that significant value can be created for shareholders from the GKN acquisition. On the Nortek disposal, it sees room for a total return of up to 25p a share, worth about 15% of the company's £7.5 billion market capitalisation.

Investec Securities has a price target of 235p, with UBS at 185p to reflect the forecast payment of a second special dividend worth £547 million in the 2022 financial year.

Proceeds from the Nortek air management disposal are also being used to bolster GKN's UK defined benefit pension schemes, as well as to reduce group debt.

A further £100 million has been raised from the sale of Loughborough-based Brush, which specialises in turbogenerators, transformers and switchgear. Brush is the final business to be sold from the FKI acquisition in 2008, which Melrose said has provided a 2.6x return on shareholders' initial equity.

Savannah Resources

The chief executive of Savannah Resources (LSE:SAV), which owns western Europe's most significant spodumene lithium project, has bought more of the company's AIM-quoted shares.

The latest purchase worth almost £9,000 increases David Archer's stake in Savannah to 2.39%, having also spent £14,400 on two separate transactions at the start of the month.

Archer is due to host a webcast after Savannah's AGM on Wednesday, when he will reflect on a year in which record sales of electric vehicles and the soaring price of spodumene have highlighted the potential of the development stage Mina do Barroso project in Portugal.

Savannah, whose shares have fallen a penny since April to close at 3.55p on Friday, was last week named a founding member of a newly created association bringing together 23 entities from across Portugal's burgeoning lithium sector.

Archer said: “Portugal has all the characteristics to lead the development of the lithium value chain. It has the largest resources of spodumene lithium in Europe and the largest spodumene development project in western Europe, Savannah's Mina do Barroso.”

The price of spodumene, which is the most abundant lithium-bearing mineral found in economic deposits, bottomed out at the end of last year at just below US$400 per tonne and has since risen by around 80% to close to US$700 a tonne in mid-May. 

The company, which raised £10.3 million from new and existing shareholders in a placing in April, also has the Mutamba heavy mineral sands project in Mozambique, which is being developed in a consortium with Rio Tinto.

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