Edison Investment Research Limited: Melrose Industries (MRO): Initiation - A proven, high-value creation model

London, UK, 1 November 2021

Melrose Industries (MRO): Initiation - A proven, high-value creation model

Melrose has a proven track record for creating shareholder value through its 'buy, improve, sell' model. Focus on financial returns and close management alignment with shareholders ensures tight discipline in the acquisition and disposal phase to combine with the key value enhancement achieved in the improvement phase of the strategy. The circularity of the model provides clarity: monies are raised to finance individual transactions with the disposal proceeds subsequently returned.

Melrose's ultimate value creation comes from the sale of its assets. Assuming GKN margin improvement of 400bp, in line with management targets of 10.5% for GKN (historical record +600bp), and 150bp expansion in the exit multiple over acquisition (historical record +250bp) translates to a discounted valuation of 226p. Note this assumes only a partial recovery in end markets (sales -15% from pre-pandemic levels), a full recovery would increase our valuation to 255p a share.

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