Melrose Industries rallies as Citi remains 'high conviction' in the buy case

The bank said mid-term cash generation is a central question for investors.

"The growth in receivables, driven by ‘pull forward’ revenue recognition from the RRSP portfolio, is key to understanding the relationship between profit and cash," it said.

"In this report, we utilise some of the information from the RRSP explainer to drive our receivables estimates."

Citi said that from its analysis, it concludes the company could be generating about £450m to £550m free cash flow in the 2027/2028 timeframe, versus VA consensus of £320m to £420m.

"On peer free cash flow yields, this gives a valuation of £6-8, i.e 30% upside at the low end," it said.

At 1510 GMT, the shares were up 3.9% at 492.62p.

Shares in Melrose surged last 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.