Melrose Industries Plc

Melrose Industries Plc (LON: MRO) is a FTSE 100 listed investment Company that specialises in buying strong fundamental manufacturing business, which can be further improved in terms of performance.

Rationale for Valuation – Hold at GBX 169.61

• The Company saw a record adjusted free cashflow, Group’s net debt reduced, and Nortek Air Management operating margin doubled since acquisition.
• As per valuation metrics, Price/Earnings, EV/Sales, and Price/Cash Flow multiples are currently lower than the Consumer Goods Conglomerates industry multiples.
• From the technical standpoint, shares were trading well above the short-term support level of 100-day (around GBX 167.84) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The overall business of the Company could be affected by a change in regulations and government policies.
• COVID-19 is causing substantial disruptions to the respective supply chains and the end markets, while the customer demand is shrinking as activity levels have been reduced.

Financial Highlights (for the year ended 31 December 2020 (FY20), as on 4 March 2021)

(Source: Company Website)

• During the second half of 2020, the Company was trading at the top end of management expectations and achieved an increase in revenue.
• The Company saw a strong cash generation, with a reduction in net debt of more than £400 million and adjusted free cash generation was 6% higher than in 2019.
• The Board has proposed a final dividend per share of 0.75 pence, supported by the excellent cash generation achieved in 2020.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

The Company witnessed good business in GKN Aerospace, with a growing Defence division. However, during the global pandemic, the aerospace sector has been mainly hard hit and also not seeing any recovery due to global travel restrictions. Meanwhile, in H2 FY20, the sales and margins recovered sharply in Automotive and Powder Metallurgy. It also saw Q4 FY20 sales were ahead of Q4 FY19. In the Nortek Air Management, the Company was trading strongly with 2020 sales increased by 5% YoY.

Moreover, in H2 FY20, Nortek Air Management margins are growing and reached 17.3%. It had generated record cash flows, with a significant reduction in the GKN UK pension scheme funding deficit. Overall, the Company seems to be well-positioned for good recovery and solid performance in the future. The stock made a 52-week low and high of GBX 72.00 and GBX 189.90, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Hold” stance on Melrose Industries at the current market price of GBX 169.61 (as on 22 March 2021, before the market close at 8:08 AM GMT).

Hill & Smith Holdings Plc

Hill & Smith Holdings Plc (LON: HILS) is a UK based Company that is focused on engineered products for roads and utility markets.

On 11 August 2021, the Company will release its 2021 interim results.

Rationale for Valuation – Buy at GBX 1,386.00

• The Company saw a strong cash generation and solid liquidity headroom.
• It expects a good overall recovery in 2021.
• The Company has a robust balance sheet and a strong reputation, with good visibility of future earnings from the order book and pipelines.
• The Company has decent fundamental metrics as it has maintained a Net Margin and ROE (return on equity) above the industry median.
• From the technical standpoint, shares were trading well above the short-term support level of 20-day (around GBX 1,343.3) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The recent outbreak of COVID-19 may have a significant and prolonged impact on global economic conditions.
• The Company works on complex and potentially hazardous projects, which require continuous monitoring of health and safety risks.
• It operates in multiple locations, and any change in the economic and political policy could hamper the Company’s operating performance.

Financial Highlights (for the year ended 31 December 2020 (FY20), as on 10 March 2021)

(Source: Company Website)

• The Company delivered a strong performance in FY20, supported by a good recovery in H2 FY20.
• HILS stated that it had performed well in the US regions throughout the year.
• The Company saw a strong cash generation, with a reduction in net debt.
• The Board has proposed a final dividend per share of 17.5 pence, bringing a total dividend per share of 26.7 pence.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company expects to see a good recovery in 2021.  Moreover, HILS’s long term outlook remains positive. However, the Company highlighted that the medium-term outlook would be challenging due to the market conditions' uncertainty following the pandemic. Meanwhile, it made robust 2020 trading performance, underpinned by a strong balance sheet and positive dynamics in the key end markets. Further, Government schemes are likely to support the growth of the Company. Overall, the Company has demonstrated flexibility, commitment, and resilience to weather the prevailing storm and is in a good position to emerge stronger in the future. The stock made a 52-week low and high of GBX 844.00 and GBX 1,486.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Hill & Smith Holdings at the current market price of GBX 1,386.00 (as on 22 March 2021, before the market close at 9:16 AM GMT), with lower double-digit upside potential based on 21.75x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Industry information have been taken from Refinitiv, Thomson Reuters.

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