Can H1 earnings boost confidence in Melrose Industries shares?

The Melrose Industries share price has failed to excite in recent times as combining pressures have weighed down on the business. With analysts split on the stock, Melrose shareholders will be hoping its latest results on Thursday 8 September can provide the FTSE 100 stock with momentum.

Investors’ attention will be on Melrose Industries [MRO.L] on 8 September when the UK-based manufacturing company releases its half-year results. The business acquires underperforming engineering firms with the aim to ‘buy, improve, sell’. However, following the Covid-19 pandemic, Melrose has found itself struggling.

Rising inflation and supply chain issues brought about by the Russia-Ukraine conflict have dented investor confidence, contributing to the FTSE 100 firm’s year-to-date losses. Since the start of 2022, the Melrose share price has dropped 16.6% as of 5 September, and in the past 12 months it has fallen 29%.

Despite this, the stock has pulled back some of its losses and is up 9.9% over the past six months. Shareholders will be hoping the upcoming update will provide further optimism for the firm’s future, particularly if the recovery of the aviation sector can help strengthen the progress Melrose has made since acquiring aerospace specialist GKN.

Melrose divides GKN business

The last time Melrose provided a trading update to investors was its 2021 annual report back in March. For the year, despite group revenue rising 2% year-over-year at constant currency, adjusted revenue fell from £7.72bn to £7.5bn. One positive point was its adjusted operating profit, which increased from £141m to £375m. The group also made strides in reducing its net debt, bringing it down to £950m from £3bn at the beginning of 2021.

Melrose CEO Simon Peckham updated shareholders on the significant progress the group had made with GKN, the aerospace specialist acquired by the business in 2018 for £8bn. Since gaining ownership, Melrose has split the business into three divisions: aerospace, automotive and power metallurgy.

Across 2021, it invested more than £190m on restructuring and spent an additional £200m on research and development. Within its update, Melrose also alluded to GKN’s £3.4bn debt that it inherited when it took over the business, which it has fully paid off ahead of projections.

Melrose considers selling GKN Aerospace

Melrose has made a successful business in turning around engineering companies. However, with operating costs rising and a slowdown in the automotive industry expected, some analysts are bracing for a 25% fall in Melrose’s operating profit for the first half.

“Automotive, its biggest business, remained sluggish due to supply constraints while Aerospace, its second largest business, continued to grow. While next week will reveal what impact this has had, analysts are expecting operating profit to fall 25% from the previous year to £166m,” Hargreaves Lansdown analyst Sophie Lund-Yates wrote in a research note this week.

Market spectators will be looking to see if the increase in air traffic has resulted in growth in demand for GKN Aerospace’s products and services. Peckham also recently hinted that he is prepared to sell GKN Aerospace next year. Despite meeting stiff opposition, the chief executive stated: “if someone offers us the right price, we will sell it.”

He later went on to say that Melrose has “a responsibility to try and do the best for our shareholders.” Investors will also be awaiting an update regarding the company’s £500m share buyback scheme, which was announced in June following an agreement on the disposal of its Ergotron business and is scheduled to end by 31 October.

Analysts split on Melrose stock

According to the Financial Times, 12 analysts offering 12-month price predictions for Melrose Industries as of 1 September have a median target of 208p, with a high estimate of 285p and a low estimate of 121p. With the median representing a 57.3% upside on its 5 September closing price, this suggests experts expect growth in the stock. Of the 15 analysts offering recommendations, it holds five ‘buy’, ‘outperform’ and ‘hold’ ratings each.

On 9 August, JPMorgan [JPM] reaffirmed its ‘overweight’ rating on Melrose Industries stock. The investment bank has a 215p price target for the stock, representing a 62.6% upside on its 5 September closing price of 132.25p.

However, Citigroup analysts argued in a recent research note that Europe’s ongoing energy crisis will weigh on H1 results, Morningstar reported. The analysts expect Melrose’s profits will be stronger in H2 due to the impact of automotive sector disruption in the second quarter of the year, though a potential energy shortage in Europe could hamper this recovery.