Melrose is one stock set to bloom for smart buyers

Most things cyclical or consumer-facing were ditched by panicking investors through the downturn so for a mid cap engineering firm to perform well in such conditions, it would need to be pretty good.

Step forward Melrose. This stock is enjoying strong support from some of Britain's shrewdest small-cap investors, many of whom Citywire can reveal are buying below the disclosure limit. 

Melrose's strong performance has been helped by a mini revival in UK manufacturing and better than expected UK GDP numbers but most of the credit goes to the genuinely transformational management at this company - and that is why smart money is buying in.

A tough time for cyclicals

Mid cap engineers have probably suffered as much as any cyclical businesses in the economic slowdown of the past two years, as order book worries and liquidity issues combined to drive stocks down. Melrose was caught in this. It fell to a three-year low of 58.25p on 18 November 2008 in the teeth of the downturn and questions were raised when it acquired cable, crane and hook maker FKI in July 2008. The latter was perceived as relatively cost inefficient and difficult to turn round.

Strong management

But those that questioned the firm had not counted on the durability and nous of its management team. Chairman Christopher Miller, finance director Geoffrey Martin and chief executive David Roper have almost twenty years of experience in buying-out faltering engineering firms, turning them round and then crystallising the value for shareholders.

The trio initially came together as Wassall. The current Melrose consists of the residual business of McKechnie, as well as die-cast alloy manufacturer Dynacast and the FKI business.

The trio have used their experience to make FKI more efficient, cutting costs and driving through efficiencies.

What is happening now

Last Friday’s results (27 August) saw the company raise its interim dividend by 38% to 4p per share.  The better than expected half year results which resulted in a 4.7% jump in the firm’s price on the day were its best since the manufacturing buyout specialist listed in 2003. Two working days later the firm is trading at 269p, up 11.4p on the day or almost 5%.

The strongest performance came from its Energy and Dynacast divisions. While across the group’s divisions, finance director Geoffrey Martin said the order book was up 9-10% on average giving it greater earnings visibility into 2011.

The acquisition of FKI in July 2008 now looks like good business for the firm.

It paid £1 billion for the business which has now generated £440 million in cash since the acquisition in July 2008.

Group profits for the half year to the end of June stood at £78.1 million- 28% ahead of the top-rated analysts' forecast of £62.1 million.