The Melrose share price rose to 174p this morning, on the back of an upbeat trading update. The board of directors confirmed the company is trading at the top end of expectations for 2020, but it was cautious in light of the economic environment.
Melrose's share price rallied at the start of 2020 and in February it hit its highest level since June 2017. However, between February and April the stock dropped by over 70%, making somewhat of a recovery in recent months.
Vaccine progress could boost Melrose share price
Melrose specialises in buying underperforming companies, typically in the engineering sector, revamping them and then offloading the assets.
The pandemic caused havoc to the global economy and has hit several of Melrose's key industries hard, particularly aviation. In March 2019, Melrose acquired GKN, an aerospace group for over £8bn – that left the buyout group very exposed to the impact of Covid-19. When the health crisis set in, the dividend was cancelled as a way of conserving cash and this proved to be successful. Over the summer the firm secured more favourable lending conditions for it's £3.2bn credit facility, so is more than comfortable from a liquidity point of view.
In light of the progress made on the Covid-19 vaccine front there has been a big lift in the share price of companies like Rolls-Royce and airlines such as easyJet. Should further progress be made in that area, then the Melrose share price should also be in for a boost in light of its GKN investment.
Melrose has been encouraged by the fast recovery in the automotive industry. Nortek Air Management – the ventilation and air conditioning business - is performing well. The aerospace unit continues to face challenges but management commented that business is stable. Melrose announced that group net debt will fall this year despite significant spending on restructuring, and that should take some of the pressure off from a liquidity perspective.
Melrose share price recovering after poor H1
In September, the group delivered dreadful first-half numbers, which wasn’t a surprise given the environment. Revenue dropped by 25.8% to £4.3bn, while adjusted operating profit tumbled by almost 90% to £56m. Melrose revealed asset writedowns of £179m, of which £133m were from the aerospace sector. Despite the fact that the figures were ugly, management said that trading was better than expected.
Melrose's share price recently hit an eight-month high, and if the bullish trend continues it could target the 180p zone. A pullback from here might encounter support at 140p.