Cash Savings Action Plan Unveiled by Two FTSE-100 Listed Stocks: Melrose Industries PLC and RSA Insurance Group PLC

The United Kingdom market closed the week on a positive note yesterday (on 7^th May 2020). The market sentiments were upbeat after a surprise rise in China’s export, reflecting resilience in global demand. Banks, Oil & Gas and Miners were standout performers and took the focus off the Bank of England’s projection that the British economy could contract by 14 per cent this year. Meanwhile, two FTSE 100 listed stocks from diverse industry – Melrose Industries PLC (LON:MRO) and RSA Insurance Group PLC (LON:RSA) released their trading statements yesterday. Following the business updates, the price of MRO closed at a dip of 2.24 per cent whereas RSA surged at 6.55 per cent (at close of trade as on 7^th May 2020). Let’s walk through the fundamentals of these two Companies, and understand their respective business capabilities, financial position, and outlook to gauge the magnitude of their latest trading updates.

Melrose Industries PLC (LON:MRO) – Operating with Resilient Defense Business, while Maintaining a Solid Balance Sheet

Melrose Industries PLC is a FTSE 100 listed investment company. The Company generates value by investing in manufacturing businesses with decent fundamentals and selling them after improving their performance. It specializes in the business of Automotive, Aerospace, Powder Metallurgy, Nortek Air Management and Other industrial.

(Source: Presentation, Company Website)

Shareholder Investment and Gain (as on 31^st December 2019)

• The Group has returned GBP 4.7 billion of cash to shareholders since establishment.
• It has generated 2.6x of average return for a shareholder since the first acquisition in 2005.
• Delivered GBP 1.1 billion of ordinary dividends since the first acquisition, representing CAGR of 17 per cent.

Headline Figures for 2019

(Source: Annual Report, Company Website)

Major Updates of 2020

• 7^th May 2020: In the annual general meeting (AGM) held on 7^th May 2020, the Board supported the proposal to withdraw the final dividend.
• 30^th March 2020: The Group announced several measures it has adopted to combat the impact of Covid-19 such as 20 per cent pay cut for senior salaried staff and tightly managing working capital to preserve liquidity.

AGM Trading Statement (as on 7^th May 2020) – Good Track Record of Managing its Businesses Successfully and Debt Facilities are Well Balanced

• The company provides the following trading update for the four months from 1st January 2020 to 30^th April 2020 ahead of its AGM (Annual General Meeting).
• The Company trading in line with anticipations until mid-March 2020. After completing mid-March 2020, there was a substantial disruption caused by Covid-19 outbreak, which has affected the overall financial industry. For the four months from 1 January 2020 to 30 April 2020, the group sales tumbled approximately 20 per cent as compared with the corresponding period of the last year.
• Factories in the Aerospace & Defense division has largely stayed operational, which represented 30 per cent of sales in last year’s (2019) and it is not likely to face any material impact by Covid-19 disruption.
• As previously stated in the announcement dated 30^th March 2020, the group at present is unable to quantify the impact of the outbreak and measures taken by the governments to contain the virus. The company is monitoring the situation and will provide an update on the developments once the situation stabilises. Meanwhile, the group has taken a series of steps to preserve cash and reduce cost. Currently, the Group is focusing on maintaining a robust liquidity position and adopting cash preservatives.
• Capital expenditure and trade working capital actions are projected to generate cash savings of around £200 million in the second quarter of 2020.
• The group started the year, with approximately £1 billion of committed bank facility in place at the end of April 2020.
• Further, the liquidity position is expected to be bolstered by the cancellation of the 2019 final dividend, salary deduction and employ furloughing scheme.

Share Price Performance

Daily Chart as of May 7th, 2020, after the market closed (Source: EODHD/Others, Thomson Reuters)

MRO’s shares closed at GBX 96 on 7^th May 2020. Stock's 52 weeks High is GBX 309.40 and Low is GBX 72.00. Total outstanding market capitalization stood at around GBP 4.66 billion, with an annual dividend yield of 4.81 per cent.

Predicting Upcoming Performance from Past Reflection

In the financial year 2019, the company delivered significant progress and the substantial value that is being unlocked. The group has taken multiple steps to tackle the ongoing challenging time. The Group possesses a strong balance sheet with no short-term debt maturities. MRO has taken actions to maintain a strong liquidity position and preserve cash. Presently, the company holds a committed bank facility of around 1 billion pounds. As such, the group anticipate 2020 to be another year of good progress with emphasis on efficiency programmes and record investment in R&D to maintain technological market leadership as well as to deliver operational improvements. However, the management of the Company has an opinion that it is too early to provide guidance on the impact of China coronavirus (COVID-19) on the businesses or wider economic conditions.

RSA Insurance Group PLC (LON:RSA) – Carried Forward the Momentum of 2019 and thus Performed Resiliently in the First Quarter.

RSA Insurance Group PLC is a FTSE 100 general insurance company. The Company serves in over 100 countries with around 13,500 employees. It has been protecting businesses and individuals from insurable risk for more than 300 years. The Group generated revenue from personal and commercial business lines from its operations in Canada, Scandinavia and UK & International regions.

(Source: Annual Report, Company Website)

Measuring the Delivery of Strategic Objectives in FY2019

• Combined ratio stood at 94.6 per cent (FY2018: 96.2 per cent).
• Group controllable expense ratio stood at 21.3 per cent (FY2018: 20.8 per cent).
• Solvency II coverage ratio stood at 168 per cent (2 pts lower than FY2018 of 170 per cent).
• Customer Retention stood at 79.8 per cent (0.5 pts lower than FY2018 of 80.3 per cent. It reflects that the Group has stable and high customer retention.

Significant Developments of 2020

6^th May 2020: Paul Dilley would be joining the RSA Group in July as Chief Underwriting Officer for its UK and international operations.

8^th April 2020: Due to the challenges presented by Covid-19 disruption, RSA Group announced the suspension of a final dividend of 2019.

Q1 FY2020 Trading Update (as on 7^th May 2020) – Delivered Strong Performance, with an increase in Tangible Net Asset Value Per Share and Business Operating Profit

• In the first quarter of 2020, the insurance market conditions were largely unchanged, with little time for a Coronavirus effect. During March 2020, the financial sector was heavily impacted by COVID-19.
• RSA’s net written premiums reduced by 1 per cent, excluding exits, to £1,521 million in Q1 FY20 as compared with the corresponding period of the last year. The Scandinavia and UK & International premiums declined by 3 per cent and 5 per cent to £610 million and £572 million excluding exits against the last year same period. Canada premiums accelerated by 8% to £303 million, led by expansion in price and volume metrics in direct personal lines.
• In Q1 FY20 period, operating profit zoomed up by double digit (in % terms) with an improved performance in combined ratio.
• Led by an increased pension surplus, year to date profits, and FX movements, the tangible shareholders’ equity increased to £3.15 billion at 31 March 2020 (31 December 2019: £2.91 billion). Tangible net asset value per share surged to 305 pence against 282 pence at 31st December 2018.
• On 31^st March 2020, the balance sheet unrealised gains tumbled £167 million to £204 million against the 2019-year end.
• RSA’s estimated Solvency II coverage ratio stood at 151 per cent at 31 March 2020 (against 168 per cent at 31 December 2019), reflecting Coronavirus driven market impacts and planned pension contributions, and comprising the 2019 final dividend accrual, while the estimated ratio was 160 per cent, excluding this accrual.

Share Price Performance

Daily Chart as of May 7th, 2020, after the market close (Source: EODHD/Others, Thomson Reuters)

RSA’s shares closed at ~GBX 394 on 7^th May 2020. Stock's 52 weeks High is GBX 736.84 and Low is GBX 321.20. Total outstanding market capitalization stood at around GBP 4.07 billion.

Short Term Scenario – Reflecting Challenging Market Conditions

The Group’s coverage ratio fell well within the target range of 130 per cent-160 per cent. The Group affirmed that the first quarter of 2020 has shown decent performance, carrying the momentum witnessed in 2019. However, the Group is currently focusing on managing the disruption caused by Covid-19 and reconsider dividends when it is rational. It stated that the overall market was broadly unchanged in the insurance sector. The change in management and growth in the Canada division is showing decent progress. The Company is focusing on underwriting enhancement with robust cost control which could sustain the business of the Group amid the short-term disruption.