Engineering business Melrose Industries (MRO) has said it is trading at the top end of its expectations for 2020 thanks to a faster-than-expected recovery in automotive markets and massive operational restructuring.

The company also flagged a strong performance at its Nortek Air Management division, although aerospace continued to suffer. Aerospace unit sales slumped 37% in the four months to end October compared to the same period of 2019.

Even so, Melrose expects aerospace to break even after resorting to massive job cuts as part of swinging cost-savings in the face of the coronavirus pandemic.

Analysts had been forecasting £25 million of pre-tax losses on £8.85 billion sales for 2020, based on Refinitiv consensus, with around £50 million of free cash flow.

INVESTOR RESPONSE MORE CONSIDERED

The positive tone of today’s news was leapt on by investors in early trading, sending the FTSE 100 company to the top of the FTSE leaderboard with the stock jumping around 10%.

But enthusiasm was pared back by mid-morning, with Melrose management still unable to provide forward guidance because of the ongoing question marks around its markets.

Gains made by Melrose shares eased back to around 4% to 171.25p by 10.30am, although that is still their highest since the pandemic struck.

The company was able to tell investors that its net debt should be reduced come the end of this year (to 31 December). Melrose had £3.4 billion of net borrowings at the half year stage in June.

POSITIVE SIGNS

‘The benefits of significant restructuring and cost saving actions are starting to feed through and we continue to expect the business [aerospace] broadly to break even for the full year’, Melrose said.

Melrose talked about an ‘improving trend through the period’ in both its automotive and powder metallurgy divisions.

‘Encouragingly, both businesses quickly returned to profitability with operating margins over 6% for the period in automotive and over 7% in powder metallurgy, reflecting the increasing benefits arising from the significant management actions taken.’

‘While short-term uncertainty remains, we are confident that our businesses can substantially improve their margins from today over the medium-term even without the need for full end market recovery,’ Melrose concluded.

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Issue Date: 25 Nov 2020