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Melrose Industries very upbeat about GKN's prospects, even taking into account the coronavirus outbreak

The results for 2019 were comfortably ahead of the board's expectations for both profit and cash generation

Melrose Industries PLC -

Melrose Industries PLC (LON:MRO), the engineering conglomerate, rose in early deals after posting 2019 profits that were ahead of the board’s expectations.

The shares advanced 3% to 211.3p as it announced an adjusted profit before tax of £889mln, up from £672mln the year before. On an unadjusted basis, the profit was £106mln, compared to a 2018 loss of £542mln, when the company wrote down the value of poorly performing contracts by £629mln following its acquisition of aerospace and automotive engineer GKN.

Melrose said that various operational improvements and initiatives have enabled the group to write-back up around a quarter of the write-offs.

Adjusted free cash flow improved by 72% to £591mln on an annualised like-for-like basis, thus reducing leverage in the group to 2.25 times annual underlying earnings (EBITDA).

In reference to GKN Aerospace, Melrose said that despite some challenges, overall the long-term civil aerospace market remains in line with its acquisition assumptions, with an increase in international defence spending driving strong demand expectations in the aerospace defence market.

The grounding of the Boeing 737 MAX will have an impact on the division’s performance but not an especially significant one.

GKN Automotive, meanwhile, had a strong year, Melrose claimed.

An “inevitable market-driven sales decline” was offset by a disciplined operational focus and targeted cost control measures, resulting in an increase in operating profit margins that were just short of 8% in the second half.

While global production volumes are expected to remain soft and the full impact of the COVID-19 outbreak is not yet known, continued focus on cost management initiatives in its improvement plan is expected to have a further positive impact on underlying operating profit margins.

Talking of the coronavirus outbreak, Melrose has appointed advisers to explore the strategic options for its Nortek Air Management business but conceded recent events may have some bearing on the timing of a disposal should Melrose decide to go down that route.

“Notwithstanding any implications of the COVID-19 outbreak, the bedrock has now been built for the GKN businesses to attain results which were not previously achievable, and, in addition, the shareholder value built up in our longer held assets is closer to being realised. This shows, once more, that the Melrose model thrives by investing properly in businesses and giving management the entrepreneurial freedom to succeed. This is just the start of what is possible for GKN," declared Justin Dowley, the chairman of Melrose Industries.

Quick facts: Melrose Industries PLC

Price: 129.4 GBX

LSE:MRO
Market: LSE
Market Cap: £6.29 billion
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