4th Mar 2015 11:35
LONDON (Alliance News) - Shares in industrial engineering group Melrose Industries PLC fell on Wednesday after the company reported a drop in pretax profit in 2014 due to higher restructuring costs and a drop in revenue that was exacerbated by the strength of sterling.
Melrose shares were down 4.5% to 283.16 pence, one of the worst performers in the FTSE 250, after it said pretax profit fell to GBP128.9 million in 2014, from GBP144 million in 2013, as revenue fell to GBP1.38 billion, from GBP1.47 billion, due partly to a weak revenue performance in the majority of its Elster gas, electricity and water metering business and difficult trading in the Brush electricity generation business, which is grappling against tough end-market conditions.
Exceptional operating costs rose to GBP34.3 million, from GBP19.3 million, as it continued to restructure the Elster business. The 2014 restructuring focused on the gas business, whereas it had restructured the electricity and water businesses in 2013. It also booked GBP3.7 million of acquisition and disposal costs, up from GBP0.5 million a year earlier, mostly related to its acquisition of Eclipse.
Sterling strengthened against most of the currencies of the countries in which Melrose operates, and this weighed heavily on translated revenue. It said revenue would have been flat if exchange rates had remained flat over the year.
The company's closely-watched pretax profit before exceptional costs and income and intangible asset amortisation, rose 11% to GBP213 million however, and would have been up 21% if exchange rates had remained constant. This measure of profit was up in all three Elster divisions, as the restructuring paid off and operating margins improved substantially.
Melrose said the overall market conditions it faces in 2015 remain tough too, but says the Elster business still looks well-positioned for growth. It expects to face further adverse currency movements this year and said the order intake pattern reflects a more pronounced weighting for its results to the second half. It also expects the Brush arm to continue to struggle due to end market conditions.
The Brush turbogenerators business saw both underlying revenue and profit decline in 2015 amid challenging market conditions, particularly in new build generators.
Melrose said the market dynamics remain difficult for Brush in the short term and it expects profit from the unit to decline significantly this year, despite measures taken to improve the business and the better performances in its aftermarket, transformers and switchgear segments.
The company added that while Brush has managed to maintain its market share, the downturn in demand from manufacturers does not appear to be abating in the near-term, though it remains confident on the medium and long-term outlook for the business on the back of an expected recovery in its end markets and good performances from its aftermarket and switchgear divisions.
Though underlying profit grew across the three Elster divisions, underlying revenue only increased in its gas business, boosted by improvements in the North American and German markets. End markets for the gas unit remain healthy in 2015 and the unit registered higher year-on-year order input. Melrose does expect the oil price decline to impact on the timing of some gas metering station projects in 2015, but said the high demand in its conventional gas meter markets should offset this weakness.
Underlying revenue in the Elster electricity business declined over the year, though Melrose expects an improvement for the division following consolidation of its production and supply chain operations in 2014. A number of pilot smart meter projects in Europe, the Middle East and Africa are due to come online in 2015 and Melrose expects to win further business in South America as utilities continue to focus on reducing electricity wastage through the roll out of integrated metering platforms.
Elster water also saw underlying revenue fall in 2015, primarily due to the impact of the company exiting low-margin business in North America and Germany. Middle East revenue was also lower, due to weaker-than-expected demand, but this was offset by a better performance in Africa. Europe revenue overall declined due to the company exiting low-margin products.
Melrose has proposed a final dividend of 5.3 pence per share, up from 5 pence last year, bringing its total dividend for the year to 8.1 pence per share, up from 7.75 pence. In addition to the dividend, Melrose said it intends to return GBP200 million to shareholders along with a 13-for-14 share consolidation this month. The return is being made following the sale of its Bridon Group wire and rope business.
"We are delighted with Melrose's performance in 2014 with profits up 21% in constant currencies," said Melrose Chairman Christopher Miller. "We look forward to a further acquisition in due course to continue our success."
Brokers said Melrose's results were in line with expectations but are cautious on the outlook for 2015 due to potential foreign exchange movements and the diverging fortunes of the Elster and Brush units.
Investec said the results are very much in line, with good growth in pretax profit in Melrose's continuing operations on strong margin improvements.
The broker held its underlying pretax profit forecasts for 2015, excluding currency translation effects, but said the divisional mix changes significantly, with the Elster metering business offsetting weakness in the Brush generators unit.
Investec cut its target price for Melrose shares to 328 pence from 335 pence, based on a 2016 earnings exit-multiple sum-of-the-parts valuation, but keeps its Buy rating.
Liberum said the results were broadly in line with its own estimates, echoing Investec in noting the strong underlying performance of Elster and the tough market for Brush.
The broker said Melrose is 40% exposed to the euro which, combined with a smaller exposure to the Brazilian real and the Russian ruble, caused it to cut its 2015 earnings estimates by 5%.
Liberum said Melrose has an impressive track record of creating value and the prospects for the Elster business look good, but says the lack of any news on another acquisition and the currency headwinds could put some short-term pressure on its shares.
Liberum keeps its Buy rating and 330 pence price target on Melrose, arguing any over-reaction in the market to the currency headwinds will create a buying opportunity.
By Sam Unsted; [email protected]; @SamUAtAlliance
Copyright 2015 Alliance News Limited. All Rights Reserved.
Related Shares:
Melrose