Goldman adds Melrose to Conviction List, says it's fundamentally undervalued

Goldman said the stock is "fundamentally undervalued" and that its share price materially underestimates potential future value creation.

"On our analysis, we highlight that GKN could be circa 40-60% earnings accretive to Melrose under a range of GKN margin scenarios by 2020," the bank said, as it reiterated its 12m sum-of-the-parts price target of 320p, which remains premised on 120p value creation from inorganic growth opportunities in addition to a 200p valuation for Melrose’s existing assets.

Acquisitions aside, Goldman also sees scope for potential value creation from the disposal of some or all of Nortek in 2018, as previously flagged by Melrose management.

As far as risks are concerned, GS said there is still some risk the GKN deal might be blocked. "Despite UK defence revenues only equating to circa 1% of GKN’s revenues, the debate has been well publicised and UK government intervention remains a risk, although not our base case. The deal is also waiting CFIUS (US) clearance," it said.

In addition, it pointed out that the company’s high US exposure means it would be negatively affected by a depreciation of the US dollar versus the pound. However, earnings would benefit from depreciation in the yuan versus the pound.

At 1500 BST, the shares were up 3.2% to 224.90p.