Peter Dilnot may be quietly satisfied at the performance of the Melrose share price on his watch and especially since it became a focused international aerospace and defence company last April.
It was then that GKN Aerospace was formally split away from GKN Automotive, the two arms of the grand old dame of British engineering, which after a period of flatlining non-performance, got itself taken over in 2018 after a bad-tempered hostile approach from Melrose Industries, the acquisitive conglomerate.
Since the spinout of the GKN Automotive business into the separate listed company now called Dowlais, Melrose, which is GKN Aerospace in all but holding company name and now a one-trick pony, unfettered by the conglomerate tag, has seen its shares soar 71 per cent.
It is a performance not out of place with one of its aerospace and defence peers and customers, Rolls-Royce, which has seen its shares nearly double in price in the same period.
At Rolls, Tufan Erginbilgic, the self-proclaimed turnaround expert, has been acclaimed as something of a messiah for apparently resurrecting what he referred to as a “burning platform”.
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Perhaps Dilnot should be taking similar plaudits at Melrose. Having joined Melrose four years ago from the rubbish clearance industry where he ran Renewi — Shanks as was — he is officially Melrose’s chief operating officer.
What that actually means is that he is the bloke running GKN Aerospace while the rest of the executives who formed and/or ran the previous incarnation of the company, sit back and watch their shareholdings and long-term bonuses mature.
But Dilnot can’t claim any great wand-waving powers over the past nine months any more than Erginbilgic can; the latter has reorganised his company — as has Dilnot — but all the share price appreciation in 2023 has been about the normalisation of the industry after Covid as it returns to a glide path of growth and substantial cash inflows.
According to analysts at JP Morgan there is more to come. Melrose is now one of the broker’s “key picks” for 2024 with “a simple and attractive” investment story in “markets offering significant and visible growth”.
GKN Aero makes engine components for Pratt & Whitney, GE and Rolls-Royce, which all supply the great passenger jet manufacturers Airbus and Boeing, for whom GKN Aero also supplies parts for wing, fuselage and tail assemblies, as well as for business jets and helicopters. In defence, it is on the F-35 fighter jet programme and supplies Chinook and Apache helicopters.
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Key to the investment thesis is the “risk and revenue sharing partnership” structure of GKN Aero’s contracts with its customers, which means it is a beneficiary of the lucrative maintenance aftermarket.
From 2022 to 2025, Melrose is expected to report revenues to rise by more than a third to £3.9 billion and its underlying operating profit to increase by about 180 per cent to £822 million as profit margins go from single digits to 20 per cent. The shake-up at GKN Aero is delivering a transformed business.
Yet for the potential investor, as the sage old country advice might suggest, you wouldn’t want to be starting from here. How much upside is there left in the Melrose share price? And that is where JP Morgan’s optimism begins to lose its lustre as even it has a target of only 620p. That was only 11 per cent above the share price when it did its sums at the end of the last week; Melrose’s share price has risen to 581p this week and that has now trimmed the upside on the broker’s calculations to just 7 per cent.
On last year’s expected earnings, Melrose is trading at 33 times. On 2024’s expected earnings, the multiple drops to 22 and to 16 times for 2025. But that’s not too expensive for the sector.
Advice: Buy
Why? Shares have had a good run, but there should be more to come
Tortilla Mexican Grill
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Inflation and the cost of living crisis may have left a sour taste in the mouths of Tortilla
Mexican Grill investors, but the big question is not whether, but when will the small-cap
restaurant chain start bouncing back from its travails?
The positive news for investors is that Tortilla remains ahead of its target of opening 45 new
sites across the five years following its initial public offering in October 2021. At IPO, it had
62 restaurants, of which 50 were owned and 12 were franchises.
Although its retail sites suffered a knock-on hit from weak footfall, it signed successful
franchise deals in transport hubs with Compass and SSP, while the UAE franchise business
enjoyed a record year. Management is exploring further franchise opportunities in the
Middle East and continental Europe, notably France, Germany and the Netherlands.
December’s profit warning was not great, of course. At flotation, the company was guiding
the market towards underlying earnings of £8 million; then suddenly its house brokers at
Liberum Capital were downgrading its 2023 earnings from £5 million to £4.5 million and its
2024 earnings forecast by 20 per cent to £5.6 million. Meanwhile, it cut its 2025 guidance to
£6.9 million and slashed its price target from 140p to 115p.
Despite its struggles, last year Tortilla opened seven UK stores, including one franchise, and
closed two of its delivery units, taking the total estate to 87 outlets at the year-end. It
confirmed at least another four openings with SSP over the coming year, and said it had
secured a solid pipeline of new sites in high-footfall city centre and shopping centre
locations.
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Over the coming years, the core target for the group, which opened its first store in Islington, north London, in 2007, is to restore margins and return the business to profitability, although in the
meantime it must focus on trying to revive its bombed-out share price. The stock, which was
floated at 181p, fell by 2½p, or 5.3 per cent, to 45p, matching the record low that it closed at on
Monday.
So how to boost the share price? With deal-making back on the table, the obvious scenario
is for Tortilla to seek a suitor.
Advice: Buy
Why? It needs to follow Fulham Shore, City Pub Group and The Restaurant Group into the
private arena.
