The acquisitive industrial engineering group confirmed losses in the second quarter as lockdown caused factories to close
Rebound in June not enough to help Melrose post strong results
- While the group posted losses in Q2, investors welcome news that as lockdowns lifted in June, business rebounded and broke even
- Concerns remain around aerospace as full year guidance shows sales expected to fall and business to just breakeven
- Downbeat assessment sees shares fall by over 10% at the open
- Recommendation: Prior to these results being announced we viewed the shares as a ‘Buy’ only for the very brave contrarian investors, our recommendation is now under review
Not much good news was expected from Melrose, the serial acquirer of industrial and engineering assets around the world, and indeed this was confirmed this morning as they reported that group revenue fell by 27% for the first half of the year. Naturally the damage came in the second quarter when shutdowns in Europe and the US began, leaving factories to shut operations. The group made a loss during the second quarter but there may be some hope for investors in hearing news that, as lockdowns were lifted in June, business rebounded to at least breakeven at the operating profit level.
However, this is little comfort for investors given the wider picture, especially in aerospace which is being severely hit by the lack of global travel and grounded aeroplanes. Management have dealt a blow in confidence by stating that there will be no recovery in this sector for the remainder of the year, with new management guidance stating that sales for the year are expected to fall by 25-30%. This would see the business only just break even.
This downbeat assessment has left the shares as the leading laggard in the FTSE100 this morning, falling by over 10% at the open. This was further hampered by the news that the interim dividend won’t be paid which follows on from last year’s full year dividend being cancelled too.
There is some better news from its automotive and metallurgy businesses, seeing an improvement in recent weeks with Chinese sales strong and US sales not as far behind as last year. However, this is one of the more severely hit businesses from the global pandemic, and its end markets are highly cyclical with car sales possibly at risk if the looming recessions in many regions last longer and deeper than expected. Meanwhile passenger air travel is also at the mercy of government measures to stop the virus from spreading. Prior to these results being announced, we viewed the shares as a Buy only for the very brave contrarian investors, a view we maintain for the time being.
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