Management remain positive as operating profits rose.
Acquisition of GKN pushes Melrose to a loss in latest results
- Shares in the FTSE 100 engineering group lifted slightly in reaction to half year results despite reporting loss of £276m.
- Management reassured investors that acquisition is going well and identified areas of leading technologies which it will look to boost.
- We recommend Melrose as a ‘buy’ for balanced investors.
Engineering group Melrose, who made the high profile acquisition of GKN recently, reported half year results this morning which investors should note were mildly positive when compared to expectations. Reported revenues were £2.94bn ahead of the consensus £2.76bn resulting in the share price being lifted by a few percentage points in early trading. The adjusted operating profits rose to £280m from the previous year’s £141m but the acquisition of GKN led to a reported loss of £276m.
The key issue for investors is how the early days of the acquisition is going and they should be pleased that management says it is going well with significant progress already made. All GKN businesses are being managed successfully on a standalone basis, freed from bureaucracy, with long term improvement plans agreed with divisional managers. The decentralised GKN operations has empowered operational management teams and aligned them to Melrose’s ethos.
The restructuring within GKN should begin to fix many of the issues that Melrose previously identified, including the loss making operation in North America which had poor customer relationships. Management acknowledge that GKN has some leading technologies in aerospace and will be looking to push the sales of these products further and it plans to expand in Asia which it sees as the largest aerospace market by the mid-2030s. There are leading technologies within its Automotive business too and management seem keen to ensure that it won’t be left behind in the structural shift towards electric cars.
As a result of the GKN acquisition, other existing businesses are being monitored more collectively. However, today’s update suggests that these divisions have been trading in-line with expectations.
There may be concerns amongst investors that management’s focus will switch to fixing GKN while other businesses receive less attention. The group did also highlight that trade tariffs and commodity inflation will create headwinds in the short to medium term. However, we believe that Melrose’s track record suggests otherwise and continue with our medium risk ‘buy’ recommendation for investors seeking a balanced return.
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