Melrose Industries (MRO) Plans to Infuse More Than £250 Million In Electric Car Boom

Melrose Industries announced its intention to invest more than £250 million to ramp up its activities in the electric car market. The announcement was made following its acquisition of engineering group, GKN in a bitter hostile takeover battle last year worth £8 billion. The ambition to increase investment came as a part of an aggressive plan outlined by the new head of GKN Automotive, Liam Butterworth, to boost margins in its aerospace and automotive divisions beyond what shareholders had been promised.

The company, as part of a five-year ownership plan, has set a profit margin target of 10 per cent in automotive and 12 per cent in its aerospace division. Liam Butterworth said the £250 million would be equally spent over the next five years and will see GKN building factories which cater for electric vehicle parts. The capital expenditure would also boost the company's profile as a route for domestic investors to gain exposure to the hotly anticipated electric car industry's boom.[optin-monster-shortcode id="wxhmli4jjedneglg1trq"]

The company almost entirely manufacturers products for the conventional diesel and petrol cars and has a 44 per cent market share of providing conventional cars with their front-wheel driveshafts. The company can make only £60 and £120 per traditional vehicle. Electric vehicles, which represents a profit per car for GKN of £2500 to £3500, are much more lucrative as they require two so-called electric drive units (electric motors and transmission), as well as driveshafts for both front and rear wheels. The company has sold only 850,000 of such "eDrive" systems and looks to increase its capacity with its ambitious intended capex plan. Presently, only 1 per cent of the business caters to electric cars market. A Melrose spokesperson described the investment as "very exciting" and is made for the future. Currently, volumes are in the conventional drive market, though it is a massive opportunity for the company.

Melrose’s £8 billion acquisition last year of GKN triggered fears of cuts to UK jobs and investment and was one of the most acrimonious takeover battles in the City of London for a decade, since takeover of Cadbury by Kraft in 2009. This prompted backlash from politicians and trade unions but was eventually cleared by the UK government, with Melrose promising to deliver higher profit margins. The company has to agree to hold on to GKN’s core aerospace business for at least five years and had to make binding undertakings on the future of defence contracts.

Mr Butterworth, who was appointed in October 2018, said he could save more than £200 million in the automotive division with better procurement, £50 million from reducing fixed costs and £75 million from more efficient operations. The automotive profit margins of 10 per cent planned by the company are more than the 6.7 per cent reported last year and reflect an increase in the 9.5 per cent margin previously expected. Lately, the company's share price has been weighed down by weak global car market sentiments, combined with China's tariff wars.

Share Price Commentary

Daily Chart as at April-04-19, before the market closed (Source: Thomson Reuters)Â

On 4th April 2019, at the time of writing (before the market closed, GMT 10:20 am), MRO shares were trading at GBX 193.20, down by 0.5 per cent against previous day closing price. Stock's 52 weeks High and Low is GBX 248.8/GBX 145.94. The outstanding market capitalisation was around £9.42 Billion with a dividend yield of 2.38 per cent.

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