Melrose Industries returns to profit and signals another dividend

Melrose Industries swung back into profit in the first half of the year as the industrial group cheered investors with trading that was ahead of expectations and the prospect of another bumper payout. 

Shares in the FTSE 100 group jumped nearly 6 per cent to 181.44p after the company, which owns aerospace and car parts group GKN, said its businesses were benefiting from the recovery in air travel as well as cost-cutting measures.

The company confirmed previously announced plans to return £730m to shareholders from the proceeds of the sale of its US air conditioning unit. It said it would announce another payout next March, assuming its businesses continued to recover as expected.

Analysts at house broker JPMorgan Cazenove estimated the company could make a return at a similar level. 

Melrose has in the past generated substantial returns for executives and shareholders through its focus on buying underperforming manufacturing businesses, restructuring them and selling them on. In the process, Melrose has generated substantial returns for executives and shareholders.

The London-based company acquired GKN, the car and aircraft parts company, in an £8bn hostile takeover in 2018. The purchase of GKN gave Melrose significant exposure to two sectors that have been among the worst affected by the downturn triggered by the coronavirus crisis. 

Melrose reported an adjusted operating profit for the six months ended June 30 of £223m compared with a loss of £11m last year. It reported a narrower loss after tax of £151m, down from a loss of £585m the year before. Revenues for the period rose nearly 6 per cent to £3.8bn. 

The company said it had delivered on its commitment to improve the funding of GKN’s UK defined benefit pension schemes ahead of schedule. It has reduced the funding deficit from around £1bn to £150m.

Simon Peckham, Melrose chief executive, said the company was “getting towards the end of that process of convincing shareholders that GKN is a mix of great businesses . . . great businesses that just needed a bit of improvement”. 

It had warned in May that progress in the automotive sector was being delayed by a global shortage of computer chips. On Thursday, the company said that while the shortage was continuing, its automotive business was benefiting from a shift to electric vehicles. Sales rose by 34 per cent in the first six months compared with the same period the year before.

The company is facing strike action at its automotive engineering plant in Birmingham over plans to close it. The factory in Erdington assembles driveline systems for petrol and diesel cars. Peckham said the factory had lost money every year for the past 10 years.

“Some 40 per cent of its sales are prop shafts which will go away with electrification,” he told the Financial Times.

He said the company now had a “clear route to delivery” for both the automotive and powder metallurgy businesses. The company is further behind in the restructuring of its aerospace division where trading has been held back by the drop in air travel due to the coronavirus pandemic. 

Peckham, however, said the company was beginning to see an “uptick in civil aerospace demand”.

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