How are Automotive and Powder Metallurgy Divisions of Melrose Industries Performing?

  • December 01, 2020 02:48 PM GMT
  • Hina Chowdhary
    Director, Equities Research Hina Chowdhary
    1376 Posts

    Hina Chowdhary is the Director, Equity Research at Kalkine and has an extensive experience of about 15 years in the area of Research, which includes 5+ years in Equities Research particularly.She has earned a Master of Science degree from the renowne...

How are Automotive and Powder Metallurgy Divisions of Melrose Industries Performing?

Summary

  • Melrose Industries Plc has reported an adjusted revenue contraction of 25.8% during H1 FY20.
  • The automotive segment has reported profitability with operating margins over 6% for the four months period ended on 31 October 2020.
  • Nortek Air Management is trading at its peak under Melrose ownership.

Melrose Industries Plc (LON: MRO) is the LSE listed industrial stock. Based on 1-year performance, shares of MRO have generated a return of -33.58%. Shares of MRO were up by close to 4.14% from the last closing price (as on 01 December 2020, before the market close at 08:05 AM GMT).

Melrose Industries Plcis the FTSE 100 listed Company,which owns manufacturing and industrial business with leading market position operating across several geographies. The Company's reportable business segments are Aerospace, Automotive, Powder Metallurgy, Nortek Air Management and other industrial divisions.

Upcoming Events – The Company will announce its full-year results on 04 March 2021.

Industry Overview

The output for the industrial sector has witnessed a substantial drop due to Covid-19 pandemic across various nations. The Aerospace sector needs significant protection against the weakening macroeconomic environment due to its bulging order book and prolonged delivery time. The Automotive industry comprises manufacturing of motor vehicles and highly relies on the global economic environment for the business. The automotive section accounts for about 75% of the global Powder Metallurgy market.

FY20 Trading Update (the four-month period from 1 July 2020 to 31 October 2020) as on 26 November 2020.

The Company has provided a trading update for the four-month period from 01 July 2020 to 31 October 2020 having all numbers calculated at the constant currency.

Aerospace – The revenue for the aerospace business segment has witnessed a decline of 37% for the four-month period ended on 31 October 2020. Civil Airframe and Engines have demonstrated a sharp decrease in the said period due to COVID-19 travel restrictions. However, it is expected that the business will achieve breakeven driven by benefits of significant restructuring and cost-saving actions.

Automotive – It comprises Driveline, All Wheel Drive and e-Drive (together e-Powertrain). The revenue for this business segment went down by 3% for the four-month period and witnessed significant recovery from the levels of what it has shown during H1 FY20. It fell by almost 37% year-on-year during H1 FY20. The automotive segment has reported profitability with operating margins over 6% for the period.

Powder Metallurgy – The Company is a  global leader in precision powder metal parts for the automotive and industrial sectors. The Powder Metallurgy business segment performed better and reported a revenue decline of 7% lower for four months ended on 31 October 2020 compared with the similar period of the prior year. The revenues have declined 32% year-on-year for H1 FY20, but it has witnessed significant improvements due to strong measures taken by the Company to control its costs.

Nortek Air Management – Nortek Air Management includes the Nortek Global HVAC (“HVAC”) and Air Quality & Home Solutions (“AQH”) segments. The segment has performed well for the four-month period with an impressive revenue growth of 13% compared to the same period last year and nearly three percentage points of operating margin improvement. Nortek Air Management has achieved its highest trading performance under Melrose ownership. 

Other Industrial – It is trading as per the expectations set by the Company.

The Company has a robust financial position reflected by healthy cash generation during the four-month period which is more than the Board's expectations with significant restructuring actions continuing to be self-funded through an improving trading performance and ongoing working capital inflows. 

H1 FY20 results (for six months ended 30 June 2020) as reported on 03September 2020.

(Source: Company presentation)

  • The Company has reported a decline of 25.80% in its adjusted revenue to £4,359 million during H1 FY20 from £5,875 million during H1 FY19. Similarly, adjusted operating profit has also shown significant reduction from £541 million during H1 FY19 to £56 million during H1 FY20.
  • The Company has reported an adjusted loss after tax of £32 million during H1 FY20 due to noticeable growth in restructuring costs, while it has reported a profit after tax of £332 million during H1 FY19.
  • Regarding the financial position, the net debt of the Company reduced by £93 million as of 30 June 2020. The Group had £1.2 billion of committed debt facilities, excluding £300 million of cash in hand.
  • The Company has shown its substantial cash-generating abilities and reported free cash flow of £213 million as of 30 June 2020.
  • The Grouphas various undergoing restructuring projects which will improve the trading performance of the Company by over £100 million next year.

 

Recent Developments

04 August 2020: Financing Update

 

On 04 August 2020, the Company updated regarding its borrowing arrangements with its banking syndicate. The Company is having committed £3.2 billion of revolving credit facility to be repayable in January 2023, and the Company's committed term loan of £0.9 billion can be extended to April 2024 at its option.  In addition to these determined banking lines, the Company also has two bonds: a £450 million bond maturing in September 2022 and a £300 million bond maturing in May 2032.

Share Price Performance Analysis of Melrose Industries Plc

(Source: Refinitiv, chart created by Kalkine group)

Shares of Melrose Industries Plc were trading at GBX 159.85 and were up by close to 4.14% against the previous closing price as on 01 December 2020, (before the market close at 08:05 AM GMT). MRO's 52-week High and Low were GBX 309.40 and GBX 72.00, respectively. Melrose Industries Plc had a market capitalization of around £7.74 billion.

Business Outlook

The Company is anticipating a challenging time for its Aerospace business segment and expecting the weak performance of Civil Airframe and Engines to be offset by a comparatively strong Defence sector. The performance of the Automotive business segment has seen faster than expected recovery. The Company is encouraged by strong performance in its Nortek Air Management as this segment has achieved its peak. However, the Company is cautious of the short term uncertainty but highly confident of delivering improved margins over the medium-term without any need of full end market recovery.The Company is expecting to reduce its net debt despite incurring significant expenditure in restructuring.

 

 

 

 


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