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 issued an interim management statement today that covered the period from the half year to now. Management state that trading for this year is in line with expectations and that Elster (their most recent acquisition from last year) continues to perform strongly and that the remaining FKI businesses is trading as planned. They comment that "...revenue growth across the Group still remains hard to find but there are some early signs that 2014 could also be a better sales environment..."
Some specific comments on the Elster business were encouraging - the Water division has more than doubled its headline operating profit, the Electricity division's order intake was up 14% and the Gas division's sales were up 8%. Management believe that the Gas division is expected to be the source of most value creation in Elster over the medium term.
Management commented on the return of capital to shareholders and assuming the disposal of Crosby and Acco completes this year, they intend to return capital in the region of £600m. This is as a result of the following disposals:
July 2013 Truth £129m
August 2013 Marelli Motori £181m
Assumed December 2013 completion £627m
Producing total gross proceeds of £937m
I did expect them to hold more cash back to reduce their high level of net debt, but I guess their admirable willingness to return a high portion of the proceeds to shareholders, underlines their confidence in the cash generating abilities of Elster which now account for 66% of the Group.
The return of capital if it is, as in the past, in the form of cash will amount to 47p per share (based on 1,266.6m shares). Which will require another capital reorganisation if they wish to retain EPS and DPS historical comparability.
Hi Jeff,
ReplyDeleteI'm a bit surprised this has not appeared on my radar screen being such a large company. I may well add to my portfolio as it seems to be a well run outfit.
I assume after the return of capital, it will fall out of the FTSE 100 and the sp will take a hit as it will be sold by the trackers - but I'm sure the directors will have considered this.
Thanks for the write-up.