For a business in the thick of two of the most difficult global sectors — aircraft, both passenger and commercial, and cars — Melrose Industries seems to be holding its head pretty high (Miles Costello writes). The FTSE 100 conglomerate told shareholders in its most recent City update that it was trading at the top end of expectations.
Given the global pandemic, these are unlikely to be lofty, but in spite of the substantial statutory pre-tax loss that Melrose reported at the half-year stage in September, it reckons that it can break even over the year and analysts are hopeful that it will turn in a small profit. In the background, there is the prospect that it will sell Nortek Air Management, the American ventilation group that it bought in 2016 and has since improved, returning about £3 billion or so in proceeds to shareholders. Arguably, not a bad starting point.
Moreover, it is indicative of Melrose’s modus operandi: it buys underperforming industrial businesses, turns them around or improves them and sells them for a profit. It has notched up a strong record of successful ventures, including Dynacast, a precision engineer, McKechnie, a supplier of aerospace components, and Elster, the German meter manufacturer.
Its most ambitious takeover came nearly three years ago, when it took control of GKN, a FTSE 100 business in its own right, that brought in or bolstered activities including aerospace, precision metal, car systems and technology and electric trains. Proponents of the £8 billion deal argued that Melrose was one of the few operators able to turn around a group that had underperformed for years; critics felt that the buyer was biting off more than it could chew.
Bearing in mind what’s happened since, the debate arguably is irrelevant. Even before the pandemic hit, demand for new motors was on the slide and manufacturers were fretting about the impact of Brexit on their supply chains. Like carmakers, the aerospace industry was brought to a halt by Covid, with aircraft grounded, factories shut and orders on hold. In this climate, Melrose’s decision to concentrate on generating and conserving cash and making operational improvements looks sensible. It helped the group in 2020 and will boost it over the year ahead.
Aerospace looks to be the bleakest of Melrose’s businesses, with sales declining faster as last year progressed. Although its defence markets are holding up, the civil business is suffering but is expected to break even over the full year.
Automotive, loss-making during the first half, is more encouraging, based on trading picking up faster than expected when lockdown restrictions ended. The next few months are not going to be easy, but the return of the division to profitability in the third quarter shows that recovery can be swift.
Power metallurgy, which makes car parts, was also loss-making during the first half and, again, went back into the black between July and September. And Nortek stormed ahead, more than making up ground lost during the first half with a 13 per cent increase in revenues during the third quarter. With the world’s rising concern with air quality, at the very least this bodes well for the eventual price tag.
Melrose is a high-class operator and while its markets are atrocious, it is contending with them confidently. The shares, up 3¼p, or 1.8 per cent, to 186¾p trade for a respectable 20.9 times Investec’s forecast earnings for a dividend yield, absent a special payout, of 1.7 per cent. Worth a go over the long term.
ADVICE Buy
WHY Dealing very well with difficult markets and the serious prospect of fresh deals and a bumper capital return
Robert Walters
Recruitment companies tend to be a bellwether when economies are in distress (Louisa Clarence-Smith writes). They also can be an early indicator when business activity starts to pick up again.
Robert Walters, which has operations in 31 countries, was one of the first London-listed companies to experience a significant hit from Covid-19. It reported having almost no face-to-face candidate interviews in China during February. Fee income declined sharply at the onset of the pandemic, but a recovery led by Asia, which accounted for 41 per cent of net fee income last year, has begun. The company reinstated its dividend in October, citing strong recruitment demand from the technology, cybersecurity and healthcare sectors.
Kicking-off quarterly updates for the recruitment sector yesterday, it reported a further improvement in net fee growth. Robert Walters took £71.4 million in the three months to the end of December, 26 per cent lower than in the same period last year. In the previous quarter, there was a 30 per cent year-on-year drop in fees. A recovery was sustained in Asia and in Britain, which accounts for about 20 per cent of net fee income. However, Europe was static. The group has cut costs sharply during the pandemic, reducing its workforce by about a fifth to 3,147.
Robert Walters, chief executive, said: “The better-than-expected performance in the fourth quarter, coupled with the sensible and targeted short-term cost reduction and control measures that were put in place at the beginning of the pandemic, mean that profit for the full year [to the end of December 2020] is likely to be ahead of current market expectations.”
He said it was difficult to make predictions because of the volatile nature of the Covid-inspired turmoil, illustrated by some countries returning to lockdown. Yet income has the potential to bounce back fast as restrictions are lifted, economies recover and hiring increases. The shares are down by about 20 per cent since last February, despite rebounding almost 40 per cent since early October (and rising by 26p, or 5.6 per cent, to 488p yesterday). There is room for further recovery.
ADVICE Buy
WHY Will recover quickly as pandemic restrictions ease
