Melrose Industries PLC – Arranged Tweaks to Financial Covenants

Melrose Industries Plc (LON: MRO) is an FTSE 100 listed investment Group that specialises in buying manufacturing businesses with strong fundamentals, which can be further improved in terms of performance.

The Company is expected to release the half-year results on 3 September 2020.

Financing Update (as on 4 August 2020)

The Company has now agreed with the banking syndicate for amended arrangements including improved financial covenants to 31 December 2022. Following the agreements, the Group's committed term loan of nearly £0.9 billion can be extended to April 2024 and committed revolving credit facility of around £3.2 billion is now repayable in January 2023. The improved financial covenants are shown in the table below:


*Announced on 30 March 2020.
**Subject to downward adjustments upon certain material disposals.
 
Trading Statement for the half-year period ended 30 June 2020

As per the trading update released on 22 July 2020, the Group revenue for H1 FY20 declined by 27% year-on-year, due to the Covid-19 disruption. The Group delivered a loss in the second quarter of 2020. Still, it rebounded to be breakeven at the adjusted operating profit level in the month of June 2020 as recovery started to take place. Regarding the liquidity as at 30 June 2020, the Company had committed headroom of over £1.1 billion with cash in hand of over £300 million.

Share Price Performance


1-Year Chart as of 11 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Melrose Industries PLC’s shares were trading at GBX 111.40 on 11 August 2020 (before the market close at 1.15 PM GMT+1), up by 3.44% against the last day closing price. Stock 52 week High and Low were GBX 309.40 and GBX 72.00, respectively.

From the technical standpoint,shares were trading well above the short-term support level of 10-day, and 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.
Risk Assessments

The ongoing Covid-19 mayhem has already impacted the sales in H1 FY20 and it continues to impact the business growth trajectory in the near term. The Group could not meet the target of being cash neutral due to the difficult trading environment. The losses made in the second quarter can cause liquidity risk to the business.

Valuation Methodology



Conclusion
During H1 FY20, the Company delivered effective cash management to generate approximately £200 million of free cash flow (before restructuring costs and the acquisition of Forecast 3D in January 2020). The environment in which the Company is operating has shown some signs of recovery. In the first half of 2020, the Group’s Nortek Air Management unit performed well. Despite the Covid-19 crisis, the Group has sought to maintain investment in R&D to develop world-leading technologies. Moreover, the amended arrangement with lending banks shall provide flexibility and headroom to continue to focus on cash generation and adapt the Group as needed. The Group is confident of producing good returns for Shareholders in the long-term with cash liquidity of over £1 billion.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance at the current market price of GBX 111.40 (as on 11 August 2020, before the market close at 1.15 PM GMT+1) and will recommend fresh buying at the right time.
 
 
*All forecasted figures and Industry Information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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