Market news and a positive update from Melrose.

Market News


 

US Treasuries declined – the 10-year currently yields 4.76% – as ongoing diplomatic efforts to help prevent the Israel-Hamas war from expanding into a wider conflict reduced demand for haven assets. Gold slipped back to $1,919 an ounce.

 

US equites moved higher last night – S&P 500 (+1.1%); Nasdaq (+1.2%) – with markets in Asia followed the positive theme this morning: Nikkei 225 (+1.2%); Hang Seng (+0.8%); Shanghai Composite (+0.3%). The FTSE 100 is currently trading 0.3% higher at 7,649.

 

Slow economic growth and the highest sustained interest bill since the 1980s mean Jeremy Hunt can’t afford to slash taxes before the next election, the Institute for Fiscal Studies said. The think tank urged the chancellor to resist an unfunded package of pre-election tax cuts. According to data released this morning by the Office of National Statistics, UK wage growth (excluding bonuses) slowed slightly in the three months to August to 7.8%, versus 7.9% the previous month. Sterling slipped to $1.2180 and €1.1540.

 

Brent Crude trades at $89.50 a barrel. According to Mizuho’s Vishnu Varathan, the current restraint in prices is highly conditional on the conflict not spilling over more widely. Global demand for LNG will probably prove stronger than expected and the current pipeline of projects won’t be enough, said Mitsui & Co. President Kenichi Hori.

 

Country Garden is within hours of its first-ever public dollar-bond default. The builder that’s become a symbol of China’s broader property debt crisis missed the original deadline for the $15.4m coupon on the note last month, and the grace period ends on 17/18 October.

 

Corporate earnings are expected later today from Goldman Sachs, Johnson & Johnson, Bank of America, and Lockheed Martin.

 



Source: Bloomberg

Company News

 

Ahead of the Engines Investor Event taking place today and tomorrow in Sweden, Melrose Industries has this morning published a positive statement in which it confirms its margin outperformance. We believe current market forecasts have already pencilled in this progress and as a result the shares have only been marked up by 1% in early trading.

 

Melrose is a tier one aerospace technology supplier with established positions on all the world’s high-volume aircraft. Its products are on-board c.90% of civil aircraft on the market today (wide and narrow body) and the company generates 95% of its revenue from industry-leading positions. Revenue is split 70% civil, 30% defence, and is generated from two divisions: Engines and Structures.

 

R&D excellence and long-standing relationships create high barriers to entry and mean the company is well positioned for the next generation of technology, particularly that enabling zero emission flight – additive manufacturing, composite structures, and electric and hydrogen propulsion.

 

The civil industry is enjoying a rapid market recovery from the Covid-19 lows and is expected to enjoy long-term structural growth as airlines upgrade their ageing fleets after years of underinvestment. Defence is also growing given the escalation of geopolitical tension as NATO countries work to meet commitments to spend 2% of GDP.

 

At today’s investor event, the company will provide an in-depth analysis of its Engines division and highlight several key messages:

 

·        80% of profit is expected to come from Engines and over 80% of this from the aftermarket.

·        The business has OEM-level capability and responsibility for selected engines which gives more technical and commercial advantages than normal for a Tier 1 supplier.

·        Engines is a leading independent Tier 1 partner to all major engine OEMs with its lucrative and diverse Revenue and Risk Sharing Partnerships (RRSP) portfolio providing balance and resulting opportunities.

·        Two ongoing industry consequences of the recent GTF updates are likely, namely generally higher aftermarket pricing in a supply constrained industry and legacy engines potentially flying for longer – both will be beneficial to Melrose.

 

The company has also confirmed that the Engines adjusted operating margin this year will continue the outperformance seen in the first half of the year, against the 2023 target disclosed at the May Capital Markets Event. The full-year margin for 2023 is therefore expected to be around 24%, beating the previous margin target by two percentage points. Melrose now has full confidence that the 2025 targets will be achieved, and current trading makes that more secure. The biggest single reason for this outperformance is the continued strong aftermarket demand, at high margin, for the Engines business.

 

As a reminder, the group has a strong balance sheet, with net debt falling to £553m at the half-year stage, and leverage to 1.5x net debt to EBITDA. The target is to reduce leverage to 1.0x by the end of 2023. Strong cash flow generation is expected to drive attractive shareholder returns through a progressive dividend and 5%-10% shares buybacks p.a. The first £500m buyback programme (8% of the group’s market cap.) commenced at the start of October and will continue over the following 12 months.

 

Remember also that company has previously announced several senior management changes, with its CEO and Finance Director both standing down in March 2024. Both will be replaced by internal appointments, providing essential operating continuity.

Overall, this is yet another positive update and once again highlights the strong operational credentials of the management team.

 



Source: Bloomberg

 

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