UBS downgrades Melrose following strong performance

UBS downgraded Melrose Industries to ‘neutral’ from ‘buy’ with an unchanged price target of 385p following the recent strong performance, saying the next deal is more reflected in the price.

The Swiss bank noted Melrose is up 33% year-to-date, outperforming its UK engineering coverage by 25% YTD. As a result, it has reached UBS’s target price.

“Melrose operates an unusual ‘buy, improve, sell’ business model and the current leverage to any future deal upside is high given the small nature of the continuing group.

“This is being factored into the share price today - we estimate that a c£2bn deal on which management double equity over 3-4 years is now being priced in.”

UBS said delivery on a new deal in line with past deals could create an upside case of 425p per share.

The bank said Melrose is hoping to at least double shareholder equity on any deal it undertakes, adding that if history is anything to go by, it’s likely management can deliver.

“They have improved margins by 600-700 basis points within three years on their last two deals. In a low growth world and with limited self-help opportunities in our wider sector coverage group the repeating frequency of self-help at Melrose is attractive.”

At 1120 BST, Melrose shares were down 1.9% to 380.50p.