RBC Capital reiterates 'top pick' rating on Melrose
Analysts at RBC Capital Markets stood by their 'top pick' rating on London-based turnaround specialist Melrose Industries on Friday, stating that "self-help" was set to remain the key driver of the group's value enhancement.
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RBC expects Melrose's first-half figures to be in line with expectations, with a 6% decline in auto sales to be somewhat offset by cost savings, and noted that the second half of the group's trading year held plenty of upside potential as auto comparatives became easier.
The Canadian broker also pointed out that it did not see forecasts in automotive at Melrose needing "a significant pick up" in the run rate of auto production, but more simply just a stabilisation at lower levels.
With Melrose's aerospace unit acting as "a continued buffer", with strong sales growth having been reported across the peer group in the first half, RBC forecast a 2% increase in the unit's organic sales, with first-half margins at 8.4%.
Overall, RBC expected first-half group sales of £6.1bn from Melrose, underlying earnings of £500m and headline earnings per share of 6.2p.
Looking forward, although RBC pointed out that Melrose's management tends to allow a bit of leeway in their outlook comments, it still saw ample potential upside in the second half.
"We continue to see Melrose as an attractive self-help story and believe that markets worries around automotive risks are overdone creating a highly attractive valuation."