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RBC downgrades Melrose Industries but still sees value

The FTSE 100-listed group lost its place in the broker's Olympus because there is less potential upside after recent share gains

Melrose Industries PLC - RBC downgrades Melrose Industries to ‘outperform’
The group has been hit by lower automotive sales

Melrose Industries PLC (LON:MRO) shares dipped after RBC Capital Markets downgraded the stock to ‘outperform’ from ‘top pick’.

The FTSE 100-listed group lost its place in the bank's pantheon as the potential upside to RBC’s price target, even though it was upped to 265p from 245p, is not quite as great as it was after climbing more than 25% since the end of August.

READ: Melrose in a good place as GKN profits improve

Melrose, which seeks to acquire underperforming industrial businesses to improve their operational performance, has seen margins improving despite lower sales for GKN automotive offsetting the growth of GKN's aerospace arm.

According to RBC's analysts, self-help gains should continue in 2020 and auto markets are expected to stabilise, while there is potential for £5bn worth of disposals over the next two years to boost market sentiment.

Melrose had to shelve possible sales of two units in 2018, while this year saw only two sales, due to tougher economic conditions and geopolitical pressures slowing the M&A market.

“We continue to view Melrose shares as attractive into 2020, supported by a forecast 80bps of margin improvement as end markets are more stable,” analysts at RBC said in a note.

Shares dipped 2% to 230.1p on Thursday afternoon.

Quick facts: Melrose Industries PLC

Price: 236.8 GBX

LSE:MRO
Market: LSE
Market Cap: £11.5 billion
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