US Edition Melrose Industries
302.4p-25½
Questor says BUY
MELROSE Industries is a company at a crossroads. Having sold off nearly £1bn in assets last year and having just returned £600m to shareholders last month, it is now on the search for its next big acquisition.
The shares slumped by more than 8pc yesterday on falling profits in two core businesses, but Questor thinks this is a buying opportunity.
The company is a turnaround specialist that buys undervalued engineering, industrial and manufacturing companies, improves them and then sells them on. The success of Melrose was proved in last year’s results, announced yesterday.
Melrose sold five businesses last year from the acquisition of the old FTSE 250 engineering group FKI in 2008. Truth, Marelli, Crosby, Acco and Harris were sold for £950m, more than triple the value for shareholders during the five years of ownership.
Melrose still owns two large businesses from that 2008 deal, Brush and Bridon. Rope maker Bridon suffered slowing revenues and falling profits as it was hit by a slowdown in the mining industry. Electricity generator manufacturer Brush also reported falling revenue and profits amid a slowing wider market slows. These two disappointing results sent shares sharply lower.
However, over the long term things look promising. The £1.4bn acquisition of German gas and electricity meter company, Elster, is delivering profits ahead of schedule. Melrose was hoping to improve profit margins by 3pc within five years; it has achieved 5pc in the first year of ownership.
There is also the possibility of a major acquisition, up to £3bn in value in the near future. “We are looking very hard,” said vice-chairman David Roper. This raises the possibility of buying at the top of the market. However, Melrose is in no rush: “Some companies are looking overpriced, but we are patient as we have seen this before,” Mr Roper added.
Melrose has a proven track record and yesterday’s sharp correction looks overdone. The shares on 18 times forecast earnings remain a long-term buy.