Melrose reported full-year underlying revenue growth of 11% to £3.5bn, below market expectations. The Engines division grew at the fastest pace, up 26%, driven by strong aftermarket demand. Structures revenue grew 3%, with defence growth partly offset by weaker activity amongst civil customers.
Underlying operating profit grew 42% to £540mn. This was largely driven by the increased revenue and a strong performance from the Engines division, where margins improved by 2.9 percentage points to 28.9%.
Underlying free cash flow fell from £113mn to £52mn. Net debt increased from £0.6bn to £1.3bn, largely due to completing around £0.5bn of share buybacks in the year.
A final dividend of 4.0p per share takes the full-year total to 6.0p, up 20%.
In 2025, revenue is expected to land in the £3.55-3.70bn range. Underlying operating profits are expected to be in the £650-690mn range, after accounting for around £30mn of expected corporate costs.
The shares fell 8.8% in early trading.
Our view
Melrose grew revenue and profits at double-digit rates in 2024, powered by a strong performance from its Engines division. Despite this, top-line growth wasn’t quite as lofty as markets expected, putting some pressure on the valuation on the day.
Melrose is a pure-play, high-quality aerospace business. Its Structures division, which deals with building the body and wings of planes, took some shine off performance due to supply-chain issues and customers running down their inventories. But the ongoing restructuring programme, contract repricings, and new commercial agreements mean there’s room for improvement in the near-to-medium term.
While the aviation sector can be volatile, we think the current outlook for long-term growth is solid. Melrose's exposure to both military and 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 record order backlogs to supply components for Boeing and Airbus aircraft stretching all the way out beyond 2030. That gives the group good revenue visibility and means we see the potential for high single-digit revenue growth over the next few years.
The group's Engines segment has Risk and Revenue Sharing Partnerships (RRSPs) with engine makers - 17 out of 19 of which are in the cash-generation phase. 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 model (typically 30+ years), it means Melrose can continue to benefit from ongoing cash flows for decades after engine delivery.
Profitability in the Engines division continues to impress. Operating margins have sped past group targets a year early, with further improvements expected. 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.
Some issues are also outside of Melrose’s control. Production trouble at Airbus and quality issues at Boeing have dented timelines, and Melrose previously lowered its 2025 revenue guidance as a result. Supply chain issues are likely to remain a challenge for the industry, so we can’t rule out further setbacks.
Melrose is currently trading in line with its peers. With a formidable market position and an improving industry backdrop, we see the potential for upside. But with plenty of operational challenges for Melrose to navigate, there’s likely to be some volatility over the short term.
Environmental, social and governance (ESG) risk
The aerospace and defence sector is high-risk in terms of ESG. Product governance and business ethics are key risk drivers. Carbon emissions from products and services, data privacy and security and labour relations are also contributors to ESG risk.
According to Sustainalytics, Melrose’s management of ESG risk is strong.
It has board-level oversight of ESG issues and a very strong environmental policy. A part of executive remuneration is explicitly linked to sustainability performance targets, and there is a robust whistleblower policy in place. However, business is cyclical, depending highly on economic changes, which can lead to periodic layoffs.
Melrose key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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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