Melrose reported underlying revenue growth of 18% in the four months to 31 October. This was a result of solid revenue growth from both the Engines and Structures divisions which are benefitting from higher volumes and improved pricing.
Full-year revenue guidance has been lowered marginally, with Melrose now expecting revenue to land between £3.3-3.4bn, down from £3.35-£3.45bn. For the following year, revenue is expected to grow to a range of £3.5-3.7bn.
Due to improved margins in the Engines segment, which were "comfortably in excess of 25%", Aerospace's underlying operating profit has been increased from a range of £375-385m up to £400-410m.
The shares rose 1.7% following the announcement.
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Our view
Melrose is a pure-play, high-quality aerospace business. The group's benefitting from strong growth drivers which helped its Engines and Structures divisions both grow revenue at rates in the high teens.
While the aviation sector can be volatile, we think the outlook for long-term growth is solid. Melrose's exposure to military as well as commercial customers provides a welcome layer of diversification.
Airlines are also looking to upgrade their ageing fleets after several years of Covid-related underinvestment. That's resulted in an order backlog to supply components for more than 12,000 Boeing and Airbus aircraft at the last count, stretching all the way out to 2029. We see the potential for revenue to continue growing at double-digit rates for the next couple of years.
The group's Engines segment has multiple Risk and Revenue Sharing Partnerships (RRSPs) with engine makers - 17 out of 19 of which were in the cash-generation phase last we heard. The RRSPs require Melrose to contribute an agreed percentage of the total annual engine costs, and in exchange, it receives the same percentage of total annual engine revenue. Considering the long lifetime of an engine, it means Melrose can continue to benefit from ongoing cash flows for decades after engine delivery.
Profitability in the Engines division continues to impress, with margins now comfortably in excess of 25%. That's helping to fuel management expectations that total group margins can be ramped up to around 17% in 2025. While this sounds attractive, it relies on trimming fixed costs, improving productivity, and resolving issues with unprofitable contracts. By no means a straightforward set of tasks.
There are other clouds on the horizon too. While there's been a steady uptick in air travel over the past couple years, the potential for a recession hangs heavy over the market. Historically, aerospace has not been a particularly great place to hide when the economy enters a down cycle. And while supply chain disruptions have moderated, they're likely to remain a thorn in the side throughout this year.
Since the demerger of Dowlais, the historic multiples are no longer reflective of Melrose's current operations. The new, streamlined Melrose trades at 22.3 times expected earnings, which is towards the high end when compared to peers. With an improving market backdrop there may still be room for upside. But bear in mind, there are still plenty of operational challenges for Melrose to navigate, so buckle up for some volatility over the short term.
Melrose key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
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