Melrose Industries PLC (LON:MRO), the owner of aerospace and automotive engineer GKN, has warned some job cuts are “inevitable” and said it would not pay an interim dividend as revenues plunged and it fell into a loss in the second quarter.
An increased focus on cash and reducing working capital led to the generation of roughly £200mln of free cash flow, before restructuring and the costs of a January acquisition, but has had a detrimental effect on profitability for the year.
“This means Melrose is likely to make a small adjusted operating profit in the period. Bearing in mind the focus on cash generation, your board regards this as a significant achievement,” the company said.
But the board said it "does not consider it appropriate" to pay an interim dividend in 2020, having also cancelled the final payout for 2019 in May.
The FTSE 100-listed group noted that for some weeks its Automotive and Powder Metallurgy businesses factories were "largely closed" in Europe and the Americas, and the Aerospace and Nortek businesses had factories which were "largely open but with hugely reduced requirements”.
Aerospace sales were down around 18% for the half-year and are expected to fall 25-30% for the full year, with the division roughly breaking even, while the Automotive and Powder Metallurgy businesses were hit by a sharp decline in the second quarter and will see half-year sales down 36%.
Both businesses are now “seeing recovery”, with trading in China ahead of last year and signs of improving demand in Europe, Melrose said, but rising coronavirus (COVID-19) cases in many geographies and uncertainty about customer restocking.
Nortek Air Management sales were down 7%, buoyed by demand for its StatePoint technology, aimed at improving the energy and water usage in data centres around the world. Plans to look at a potential sale of Nortek will be revisited early in 2021, the group said.
The company's committed bank headroom had increased to over £1.1bn as at June 30, 2020, plus further cash in hand of over £300mln.
Melrose shares tumbled more than 17% on Wednesday morning to 99.94p.
Analysts were mostly bullish, however.
At Investec they noted that “cash expectations have been beaten despite brutal markets” and that the full year was on track to be cash neutral.
“Clarity on H1 profit leads us to cut near term estimates materially, but improve constant currency cash flow assumptions,” the analysts said, seeing a return to “near pre-COVID profitability without assuming full market recoveries” in the 2023 financial year.
“Melrose has an enviable track record of restructuring through a crisis. We also expect M&A activity will resume next year.”
At JPMorgan Cazenove agreed that cash performance was “more important” for the long-term, along with £100mln of restructuring savings to come in 2021 and Nortek’s outperformance “which likely accelerates the strategic options on the asset”.
A cash neutral full-year looks “clearly achievable”, which “should remove any lingering balance sheet concerns”.
While the challenges for aero and auto, along with management’s focus on cash over profit, results in lower near-term earnings forecasts, the Cazenove analysts “continue to see a roadmap to materially higher earnings in outer years”, driven by management actions rather than sales growth, using model that the board has delivered a number of times previously.
“The timeline may have been extended but the opportunity remains; we expect Melrose to deliver significant value for shareholders,” they added, reiterating their 165p price target and 'overweight' rating.
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