Morgan Stanley initiates Melrose Industries at ‘equalweight’

The bank said a strong Aftermarket narrative supports its profit and loss estimate 6-10% above consensus by 2027.

"We believe cash flow is set to rise materially but timing is uncertain," it said.

The bank said its detailed estimates by segment suggest strong structural growth.

"Melrose benefits from strong momentum in Aftermarket while it has early exposure to the civil volume ramp-up as it delivers products 6-9 months ahead of aircraft completion," it said.

"We estimate Melrose can capture a 10% global market share by 2030 in Repairs, fuelled by 1,500 aircraft not being retired recently.

"We expect 1) a 7% group sales CAGR 2023-30e, 6% above consensus in 2027e, and 2) 10% margin expansion by 2030 to 21% via mix, restructuring plan and business improvement."

However, Morgan Stanley said a look at the RRSP business model suggests cash visibility is limited.

"Together with our GVAT strategists we estimate that variables due to the Risk and Revenue Sharing partnerships ('RRSPs') account for circa 45% of group profitability, with timing differences between profit and cash recognition," it said.

"Flexing RRSP-related receivables by +/-15% would impact our cumulated cash estimates by -70%/+30% (2024-30e). We believe this difference should narrow as engine shop visits increase, with the cash profile improving from 2026e."