Melrose Industries finals

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 full year results on 4 March.  Revenue was 6.1% below last year at £1,377.5m, although flat in constant currency terms.  Revenue constant currency performance by division was:

 

Elster Gas +6%

Elster Electricity -4%

Elster Water -12%

Energy -3%

 

Operating profits by division showed a very different picture, as rationalisation of the Elster businesses along with cost reductions and exiting some unprofitable business showed substantial profit improvements for those parts of the business:

 

Elster Gas +13%

Elster Electricity +23%

Elster Water +11%

Energy -7%

 

Headline PBT was £212.5m up 11%, but down 10.5% to £128.9m on a reported basis.  Headline EPS was up 2% to 15.3p and on a reported basis flat at 7.8p.

 

A final dividend of 5.3p has been declared making 8.1p for the full year an increase of 4.5%.

 

Free cash flow was £73.0m below last year's £121.7m, mainly due to the sale of Crosby at the back end of 2013.  Dividends paid were £83.6m and capital returned to shareholders was £595.3m the result of a sale in the previous year.  Net cash received from disposals this year was £366.3m, of which £200.4m will be returned to shareholders in 2015.  Net debt increased from £140.8m to £501.3m. 

 

Management's outlook for the current year stated that "...Adjusting for currency effects, our Group is trading in line with management expectations for 2015 despite the expected downturn in the performance at Brush..." 

Melrose performs more like a VCT/private equity fund - buying companies, improving them and then selling them on.  So one way of looking at their performance over say 5 years is to look at the return per share.  At 31 December 2009 they had a book value of 153.1p and since then have returned capital of 122p and paid dividends of 46.95p and at 31 December 2014 had a book value of 157.9p.  This equates to a CAGR of 16.3% pa.; if you calculate an IRR which accounts for the timing of the dividends and returns of capital it is 24.5% pa.  These are very good returns from a strong management team.