Tough times ahead for industry- reliant Melrose
MELROSE is an unusual animal. It takes underperforming industrial businesses, buffs them up and sells them on. In some ways it’s more like a publicly listed private equity firm than your usual listed business.
The current batch of projects is made up mostly of the former GKN aerospace and automotive businesses, along with cooling and ventilation specialist Nortek.
But, like many private equity groups, Melrose’s model relies on significant amounts of debt. Following the acquisition of GKN, Melrose’s net debt jumped from £ 572million at the start of 2018 to £ 3.8billion at the end of 2019. The new management team had been making impressive early progress in improving GKN’s margins. However, there wasn’t time to complete the planned disposals of the group’s smaller businesses and shore up the balance sheet before the virus struck. As a result the group didn’t go into the current crisis in the best of financial health.
That makes the near complete closure of the automotive business during the pandemic, and reduction in activity in aerospace, particularly difficult to manage. So far the group’s been able to boost cash by running down inventory and collecting debts from customers. That’s actually seen it trim debt levels a little. Sales have recovered faster than expected, too.
Fortunately, Melrose has access to substantial short- term liquidity through its banks. Those lenders have also agreed to suspend some rules governing how much the group can borrow for the next year. It helps that managing industrial businesses through difficult market conditions is really what Melrose is all about.
The group should be able to weather the immediate storm, but the very subdued share price reflects the reality of weaker dividends and profits in the years to come.
“This article is designed for investors who make their own decisions without advice, if unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”