Melrose Industries interims

Melrose Industries, an engineering company that seeks to acquire businesses it understands, improve them by a mixture of investment and changed management focus, realise the value created and then return it to shareholders. I have a holding in my income portfolio (epic code: MRO).

Melrose Industries announced their interims today, with four key "take-aways" that were:

1. The recently acquired business Elster is performing strongly and profit improvement is ahead of schedule.
2. The existing continuing businesses are struggling with sales for the six months down 15%.
3. Post year-end disposal of two businesses for £311.5m (less £10m costs) representing over 15x earnings.
4. The process for the eventual disposal of Crosby is in progress, that will result in a return of capital to shareholders.

The results comprised the new business of Elster, acquired in June last year, the discontinued businesses of Truth and Marelli Motori and the existing continuing businesses. 

Revenue for the continuing businesses in the period was £1,022.2 million up 119.3%, but on a like for like (LFL) basis (excluding Elster) was down 15% to £114.1m.

Operating profit (excluding exceptionals) was £165m, compared to £75.8m last year, but on a LFL basis operating profit was down 2.6% to £73.8m.  Excluding exceptionals diluted EPS was 8.6p up 4.9%, if you include exceptionals, but exclude discontinued operations diluted EPS was 5.1p up 64.5%. The interim dividend was increased 5.8% to 2.75p and free cash flow was strong in the period at £64.6m compared to a weak outflow last year of £2.9m.

Net debt was up slightly from the year-end at £1,069.6m with gearing at 57% and interest cover of 5.3x (including discontinued businesses).  Net debt will obviously be reduced by £301.5m following proceeds from the disposals.

With respect to the outlook management state that "...with the excellent progress achieved at Elster and substantial shareholder value being created from disposals, 2013 is looking like it could be a very successful year..."

Looking at next year - for the existing continuing businesses the management see conditions slowly improving and expect a better 2014 and Elster is expected to continue to perform well.

MRO is an unusual business, with its reliance on successful deal making it has more in common with a private equity company than businesses from their Industrial peer group.  They have established a successful track record since their IPO on AIM for £13m almost ten years ago.  I have held the shares for just 3 of those 10 years and they have delivered an IRR of 31% pa (dividends and returned capital not reinvested).  They are though a complex investment to track, because of their capital returns, and restructurings, but worth the effort and I would not be surprised if performance over the next 5 years matches my historic returns.