Melrose Industries updates on RRSPs, shares surge

Melrose Industries surged on Monday after it released a document explaining the accounting around its 19 Risk and Revenue Sharing Partnerships (RRSPs) and said the portfolio was "well positioned" to generate significant returns for investors in the coming decades.

In the 40-page booklet, the aerospace engineer said RRSPs are an important part of its investment case.

It said the booklet aimed to provide "more information on RRSPs, how Melrose is positioned today, how the cash generation flows and the accounting involved".

Melrose said it would provide longer-term financial targets for the period beyond 2025 at its full-year results in March 2025 and that this booklet was not intended for this purpose.

In the booklet, Melrose said that its Engines division is "a world leader" in the design and manufacture of structural engine technology, with RRSPs forming part of the business.

"RRSPs are an important and necessary part of the aerospace engines industry with life-of-programme contracts lasting circa 50 years," it said.

The company said it had an "enviable" portfolio of 19 RRSPs covering about 70% of current global flight hours across both narrowbody and widebody aircraft.

"Following decades of investment, 17 of our 19 RRSPs are already in the cash generation phase and the remaining two are on track to turn cash positive by 2028," it said. "Melrose’s RRSP contribution focuses primarily on the design, manufacture and support of engine mount structures and cases, which typically last the life of the engine."

Melrose pointed out that it is entitled to its share of RRSP programme aftermarket income, but its work is largely done when an engine is shipped, so very high profit margins and strong cashflows are generated as programmes mature.

It also said that absolute cash generated by the RRSPs is expected to grow through to 2050, as engines age, fleet size increases and flight hours grow. In total the portfolio is forecast to produce £22bn of cashflow over the coming decades.

Melrose said that for five of its RRSPs, due to specific contractual rights, it is required under accounting rules - IFRS 15 - to record a proportion of future aftermarket income at the point of original equipment delivery.

Melrose said it was "prudent" with its accounting and typically only records 10% to 30% of aftermarket income as "unbilled work done" for these five RRSPs when new engines are shipped.

At 1520 GMT, the shares were up 9.4% at 484.38p.