As the aviation and automotive sectors have been hit hard, and profits have slumped, Melrose has scrapped their next dividend.
Melrose posts huge loss as Covid-19 hits its core business
- The group reported an operating loss of £581m in H1 and will not pay a dividend.
- Cash generation in the period was robust with £213m of adjusted free cash flow and it seems to be pushing forward with restructuring and recognising cost efficiencies across many of its businesses.
- The shares remain high risk; however we do view them as a ‘Buy’ and recommend investors drip-feed into the stock.
It was clear 2020 was going to be a challenging year particularly with some of its core businesses exposed to aviation and automotive, two of the heavily hit industries as a result of the pandemic. Despite the slump in profits in H1, the group is showing some promising signs of recovery with trading in the summer months coming in at the higher end of management expectations, particularly in the key Nortek segment.
The early decision to prioritise cash over profits seems to be paying off with the group continuing to invest in new innovative technologies, pushing ahead with restructuring projects which are expected to improve trading performance by roughly £100m over the next year. The group is also shoring up finances through reducing net debt by £93m alongside improving banking terms providing extra funding headroom for medium-term improvements.
However, we remain confident in the management’s ability to navigate through these difficult times and see the green shoots of recovery as a promising sign with trading in China already ahead of last year and North America improving quickly.
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