Forecasts made earlier this week of a “jobs bloodbath” in UK manufacturing already appear to be coming true. Industrial turnround specialist Melrose said on Wednesday that even cost savings of £100m over the first half of the year would not be enough to prevent job losses. Shares in the buyout group fell 18 per cent.
Investors are right to worry about the company’s high exposure to aerospace and automotive — two sectors hit hard by the pandemic. Revenues fell 27 per cent in the first half of the year.
The upside is a focus on cost saving and cash generation that has alleviated immediate balance sheet concerns — for now. Melrose managed to beat its target of cash neutrality for the first half of the year. Falling shares mean Melrose’s market value has halved since February to £5bn. This is almost equal to the company’s valuation before its acquisition of GKN for £8bn in 2018. The sell-off is overdone.
Job cuts and cost reductions are of course integral to Melrose’s “buy, improve, sell” mantra. Group headcount fell more than 5,000 to 56,000 last year. But coronavirus has smothered any signs of improvement this year. Margins in aerospace and automotive will collapse to zero. Automotive will rebound faster but besting 2019’s result will take years. Analyst consensus is that group operating margins should claw back lost ground by 2023.
The Melrose machine grinds on. Nortek Air Management, purchased in 2016, is nearing the end of the conveyor belt. A sale has been postponed until 2021. But Nortek sales in the first half of the year only declined 7 per cent, which is encouraging. Demand for energy efficient cooling systems in data centres is rising fast.
Nortek’s sale might raise £2bn for Melrose, says Investec. Minus a 10 per cent portion of group debt, equal to Nortek’s share of revenues, that is almost a third of Melrose’s current equity value. If successful, it will free up capital for Melrose’s next project. The crisis should leave it with plenty of opportunities.
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