Market Reaction - Melrose

Melrose presented the following trading update today:

-Company: Melrose Industries PLC

- Publish Date: 18 November 2024

- Time Period: 1 July 2024 to 31 October 2024

- Revenue increased by 7.2% compared to the same period in 2023.

- Engines division saw a revenue increase of 17.3%, driven by after-sales revenues.

- Structures division experienced a growth of 1.2-3%, affected by OE volume reductions and customer de-stocking.

- Adjusted operating profit grew in comparison to the previous year, in line with expectations.

- Engines division aftermarket business grew by 32% compared to the previous year, due to strong contributions from the defence sector.

- Despite supply chain issues, Melrose anticipates adjusted operating profit of 550 million to 570 million.

- Anticipated net debt is in line with current expectations.

- The outlook for 2025 includes a significant reduction in cash spend due to the nearing completion of restructuring programs.

- Despite ongoing supply chain challenges, strong trading progress is expected for 2025 with an adjusted operating profit target of 700 million.

- Cash flow position is expected to improve significant in 2025 and material growth is expected in the following years.

- Full year results and long-term financial targets beyond 2025 will be provided on 6 March 2025.

- Quote: CEO Peter Dilnot said: "It's encouraging that we remain on track to deliver on our full year expectations despite the industry-wide supply chain challenges...As we move into 2025, we enter a period of significant and sustained growth in our cash flow for many years ahead... I am confident that Melrose’s established capabilities, technology leadership and unique position on the world’s leading aircraft and engines will create substantial value in the future."

The full update can be found here

https://www.melroseplc.net/investors/regulatory-news/

I was surprised to see Melrose shares rise by 8% following this update. From my perspective, the company doesn’t appear to be making significant strides, and the announcement itself felt underwhelming. Supposedly, the market reacted positively because of the firm’s emphasis on its portfolio of 19 RRSPs, which they claim cover approximately 70% of current global flight hours across both narrowbody and widebody aircraft.

According to the update, 17 of these RRSPs are already in the cash generation phase, with the remaining two expected to turn cash-positive by 2028. Melrose further explained that it earns its share of aftermarket income from these programmes, with the bulk of the work completed when an engine is shipped. This means the company benefits from very high profit margins and robust cashflows as the programmes mature. They also projected that the absolute cash generated by these RRSPs would grow through to 2050, driven by the aging of engines, an expanding fleet size, and increasing flight hours. The portfolio is forecast to produce a total of £22 billion in cashflow over the coming decades.

While these projections may sound promising, the company’s track record casts a shadow over such optimism. Over the past nine years, Melrose has recorded a cumulative net loss of £1.77 billion. Out of those nine years, only three were marginally profitable, while four saw significant losses. This performance is hard to reconcile with a company that currently holds a market capitalization of £6.3 billion.