JPMorgan hikes Melrose Industries price target, shares surge

JPM said its analysis points to the Aero Engine (AE) industry being highly attractive for investors.

"It is also a challenging industry to understand with many different business models, quite complex accounting, and high investment required to generate attractive long-term returns," it said.

JPM said this can lead to periods when the share price of an AE company significantly undervalues its true "intrinsic value".

It noted that in recent years, this has been the case with Rolls-Royce, MTU and General Electric.

"We think that Melrose is significantly undervalued," JPM said. "We place Melrose on positive catalyst watch ahead of its FY24 results on March 6th 2025, when it plans to provide new medium-term guidance."

JPM said it sees 2025-30 as "something of a golden age" as AE companies benefit from aftermarket profits on the new generation engines they developed and sold over the last 15 years or so.

The bank also said it expects free cash flow to meaningfully improve in 2026-30.

"FCF in 2024-25 is depressed but we expect a material improvement in 2026-30 driven by: rising profits; the end of restructuring; the end of the GTF engine recall; and improving cash flows from a maturing RRSP portfolio," it said.

It forecasts that Melrose’s 2025-30 free cash flow will be £153m/£261m/£392m/£464m/£531m/£595m.

In addition, JPM said that more buybacks are possible. It noted that Melrose completed a £500m share buyback from October 2023 to September 2024 and is undertaking another £250m buyback from October 2024 to March 2026.

"We do not model any further SBBs although we think they could happen," it said.

JPM maintained its 'overweight' rating on the stock.

At 1040 GMT, the shares were up 7.8% at 568.20p.