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Business sales and GKN value extraction remain share price catalysts


Loss to date: 1.1%

Original entry point: Buy at 218.5p, 26 July 2018

Perhaps the most important point to be gleaned from Melrose Industries’ (MRO) half year results is that ‘no black holes’ have been found to date under the bonnet of GKN, the £8.1bn aero and auto engineer that is management’s next turnaround project.

If nothing else, comments accompanying the numbers strongly suggest that Melrose has not bitten off more than it can chew with its largest acquisition ever.

Substantial bid costs and just a couple of months of business from GKN saw Melrose run up a statutory pre-tax loss of £303m in the six months to 30 June, versus a £48m pre-tax profit a year ago.

As we explained in the original article, Melrose is still in the process of selling parts of its Nortek business, which continues to perform patchily, and we wouldn’t be surprised to see progress on this front before year-end.

But GKN is likely to dominate the agenda at Melrose for the next few years so having a better handle on the scope and scale of operational improvements and savings, and ultimately value extraction, remains a key share price catalyst.

Getting the GKN project right would be the ultimate endorsement of Melrose’s buy, improve and sell model.

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