Thursday 3 September 2020 9:29 am

GKN-owner Melrose posts £581m loss and scraps dividend on Covid-19 hit

Takeover specialist Melrose Industries today said the Covid-19 crisis had pushed it to a £581m operating loss as it scrapped its interim dividend.

The owner of aerospace business GKN said it had swung to a £581m operating loss in the six months to 30 June, compared to an operating profit of £8m in the first-half last year.

Melrose said it was recovering well from the Covid-19 pandemic shutdown with trading over the summer months at the higher end of the board’s expectations.

Investors welcomed the company’s positive projections with Melrose shares jumping 9.6 per cent to 110p this morning.

Read more: Melrose shares get a boost despite GKN job cuts and car industry warning

Revenue fell to £4.1bn from £5.5 at the same period in 2019.

The company said sales in aerospace fell 18 per cent in the period, but said defence continued to grow

Melrose said there are a “number of encouraging signs of recovery” in its automotive and powder metallurgy businesses.

It said recent trading in China was ahead of last year, North America was improving quickly with positive signs in Europe, “although the full speed and shape of improvements still remains uncertain”. 

Automotive and powder metallurgy sales were down 36 per cent in the period.

Melrose said cash generation had been “strong in the period” with £213m of adjusted free cash flow.

The company said it “does not consider it appropriate to pay an interim dividend to shareholders this year” despite the strong cash performance.

Melrose said it expects a further circa £300m of efficiency improvements in working capital to be delivered.

It said net debt had been reduced to £93m and its bank facility headroom has been increased to nearly £1.2n excluding the roughly £300m cash at hand.

Read more: GKN slashes 1,000 jobs as owner Melrose moves turnaround plan up a gear

The company agreed improved banking terms with its banking syndicated during the height of the crisis “giving the flexibility if required over the medium-term to continue to improve the businesses”. 

The company said restructuring projects are underway that will improve trading performance by over £100m next year.

It said there were “more cost saving projects are to come and there are substantial margin improvement opportunities across the GKN businesses”.

Justin Dowley, chairman of Melrose, said: “These are extraordinary times which we have addressed with rigorous cash management and decisive restructuring actions; recently, and encouragingly, we have started to see trading improving in some key end markets.”

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: “A sustained recovery in aerospace in particular looks unlikely in the near term, and that unfortunately means significant redundancies are on the horizon.

“That will come with an upfront cash cost and it will be difficult to deliver the same trick with free cash next half. It’s hard to overstate the hurdles ahead, but the nitty gritty of improving efficiency is what Melrose’s management team does best and that should provide some reassurance in the longer term.”