Melrose pledges higher margin target for GKN

Melrose Industries is aiming to increase profit margins at its acquired GKN's aerospace and auto businesses, it told investors at a long-awaited capital markets event.

Applying the central tenet of its 'buy, improve, sell' mantra to the fruits of the £8bn takeover battle concluded last April, Melrose said it would drag up profit margins to more than 11% from the 7.4% booked in 2018 and the 10% it first identified.

In presentations to more than 250 City analysts and institutions on Wednesday afternoon, the corporate raider's executive vice chairman Christopher Miller and chief executive Simon Peckham said the aerospace business could improve its margin from the 8.2% last year to more than 12% by fixing procurement and cutting the costs of servicing aeroplanes and fighter jets.

At the car parts business, divisional CEO Liam Butterworth said Melrose has identified ways of driving up margins from 6.7% to around 10% in the medium term, and saying that he has experience with such a turnaround twice before.

Analysts reported that Butterworth was eyeing a bloated cost base and poor procurement, the latter savings target being a gross £200m, operational excellence £75m and fixed cost reduction of £50m.

In the short term, cost cutting will be balanced by £300m of investment developing its electric motor and gear transmission systems for low and zero-emission vehicles.

Analyst Harry Philips at Peel Hunt highlighted that there was nothing radical in the presentation, "but the aero margin target looks easier than auto".

As well as the headline issue of margins, management commentary included the point that "the margin targets do not require volume growth to be achieved - it is about changing the core operational processes and Melrose is not going to make GKN radically different but much more make a good business perform in line with expectations".

"So the impact on GKN profitability based on the margin targets would be to take EBIT to £919m based on 2018 revenue from £624m which is an increase of 47%."

Looking at aerospace, Philips noted that the market position is strong and "underpinned by a well balanced technology portfolio - this is not new news but it is about realising the potential backed a commercial deliveries growing at a CAGR of 2.9% out to 2022 - the savings come from £70m of operational excellence, £40m procurement and £40m SG&A".

Although there was nothing radical in the presentations, Philips concluded that "the confidence in the room about the potential of GKN is so strong and rises every time we see the company. Melrose is a must own stock given its return profile and GKN is a huge opportunity."

Deutsche Bank analyst Jonathan Hurn kept his 230p target price and noted that the aerospace margin target of 12% by 2022 compared with a consensus forecast of 12.1% and his own of 12.9%.

Automotive's forecast margin of 10% by 2022 is against a consensus of 9.3% and Deutsche's 10.1%.

He observed that the margin target of 14% for GKN Powder Metallurgy had already been disclosed.