Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money

77% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

  • Updates
  • disruptive innovation

Is Melrose Industries’ share price primed for gains ahead of GKN sale?

Melrose Industries’ [MRO.L] share price looks to be in the midst of its latest recovery as it moves away from May’s 52-week low to close out last week up 5.2% to 160.5p. Yet, Melrose Industries stock remains a long way from its pre-pandemic highs of more than 270p set in February 2020.

However, there are positive noises for the FTSE 100 company and its most recent acquisition — the historical UK aerospace and automotive firm GKN.

Melrose Industries buys underperforming engineering businesses, then sets about a programme of investing and restructuring before ultimately aiming to sell for a profit. In short, Melrose Industries’ self-proclaimed strategy is “buy, improve, sell”.

The £8.3bn acquisition of GKN in 2018 has been adversely impacted by the global pandemic, and last year’s £6.88bn revenue came in 37% lower than two years previously, as its pre-tax loss rose to £618m. Despite this setback, the goal of improving GKN’s margins remains intact. And the good news for Melrose Industries is that automotive and aerospace markets are recovering post-pandemic, and this should help lift demand ahead of a sale — before the takeover specialist takes on another ailing organisation.

What’s happening with Melrose Industries’ share price?

Melrose Industries’ stock rose 5.2% last week, helping the company eke out a 1.2% gain year-to-date and 1.1% over the last 12 months. After closing at 160.5p at the end of last week, the stock is 16.1% off its 7 September 2021 high at 191.4p, but has staged a recovery of 49.3% from the 52-week low at 107.5p set on 9 May.

 

Melrose Industries’ GKN restructure takes shape

Melrose Industries is cutting costs across GKN’s largest division, automotive, by closing GKN’s factories in the US, Germany and South Korea. It’s also begun shutting down its UK plant in Birmingham. Melrose is also restructuring GKN’s aerospace arm, its second largest division, by reducing the number of sites from 51 to 33 by the end of next year. The closures have already helped save £60m last year, doubling adjusted operating margins to 4.6% — Melrose is aiming to more than double this level of margin.

Now that most globally enforced Covid-19 restrictions have been eased, air travel has been able to return to something approaching normality, and that is positive news for both GKN and Melrose. The International Air Transport Association said last month passenger traffic is predicted to return to 82.4% of 2019 levels in 2022. Melrose CEO Simon Peckham hopes to triple GKN’s profits of £375m if margin goals are achieved and its key industry sectors can return to normal.

What’s next for Melrose Industries?

Peckham has said the majority of complex operational challenges in GKN’s transformation are either complete or in progress. And while the pandemic will ensure that returns from the GKN deal will take longer than the usual four to six years of a typical Melrose turnaround, shareholder returns should still be doubled in line with its previous restructures and sales, according to Peckham,.

Despite only one pre-tax profit in the last seven years, gurufocus.com reckons we could get “2016-like returns, when [Melrose Industries] stock went up over 250% on the back of monetising its last great turnaround.” And looking further ahead, he says Melrose will soon ”look to the next opportunity”. Some observers reckon GKN could start to be sold off in 2024.

Where do analysts reckon Melrose Industries’ share price is heading?

Melrose Industries has five ‘buy’ and five ‘outperform’ recommendations, alongside four ‘hold’ ratings. There are no negative ratings among analysts among analysts following the stock currently, according to the Financial Times. This positive outlook is reinforced by the 12 analysts offering 12-month forecasts on Melrose Industries’ share price. The consensus median target of 202.5p represents a potential upside of 26.2% from last week’s close at 160.5p.

 

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

Continue reading for FREE

  • Includes free newsletter updates, unsubscribe anytime. Privacy policy

Latest articles