Morning Note: Market news and a positive update from Melrose

Market News

Donald Trump set a 10% minimum global tariff, while imports from countries with trade surpluses with the US will face duties of 15% or higher. Levies on Canadian imports will be increased to 35%, but USMCA goods remain exempt. The average US tariff rate will rise to 15.2% if rates are implemented as announced, up from 13.3% earlier. The Swiss franc dipped after Switzerland was slapped with a 39% tariff.

The President sent letters to 17 of the world’s largest drugmakers demanding they charge the US what other countries pay for new medicines. The president also asked them to guarantee that future medicines be launched and remain at prices on par with what they cost overseas.

US non-farm payrolls growth is expected to moderate to 104,000 in July from 147,000 the previous month. Bloomberg Economics expects a 160,000 increase. The dollar index rose for the sixth-straight session, while the 10-year Treasury yields 4.39%. Gold is trading just below $3,300 an ounce. Brent Crude slipped back to $71.50 a barrel.

US equities drifted last night – S&P 500 (-0.37%); Nasdaq (-0.03%). Big tech was mixed but cushioned the index performance through notable gainers (Microsoft and Meta) following strong results. After hours, Apple rose by 2% after its reported its fastest quarterly revenue growth in more than three years, with revenue rising 9.6% to $94bn in its fiscal third quarter. In contrast, Amazon fell 5% as it projected weaker-than-expected operating income and trailed the sales growth of its cloud rivals.

The FTSE 100 is currently 0.4% lower at 9,092, with both AstraZeneca and GSK trading lower. Sterling trades at $1.3195 and €1.1550. UK house prices bounced back in July (+2.4% YOY) in a sign demand is recovering after a tax increase in April discouraged prospective homebuyers, Nationwide says.

Source: Bloomberg

Company News

Melrose Industries has released results for the first half of 2025 which were better than market expectations, driven by rising defence and civil aerospace demand. The company is coming to the end of its multi-year transformation programme and is seeing a ramp-up in cash flow generation. Guidance for the full year has been reiterated on a constant currency basis. The shares have been marked up by 6% in early trading.

Melrose is a tier one aerospace technology supplier with established positions on all the world’s high-volume aircraft. Its products are on-board 90% of civil aircraft on the market today (wide and narrow body) and the company generates 95% of its revenue from industry-leading positions (and more than 70% as sole supplier).

Revenue is split 70% civil, 30% defence. The civil industry is expected to enjoy long-term structural growth as airlines upgrade their ageing fleets after years of underinvestment. Defence is also growing given the escalation of geopolitical tension as NATO countries work to meet commitments to increase military spending.

R&D excellence and long-standing relationships create high barriers to entry and mean the company is well positioned for the next generation of technology, particularly that enabling zero emission flight – additive manufacturing, composite structures, and electric and hydrogen propulsion.

There are two divisions: Engines and Structures (i.e. bodies and wings of planes). In 2025, Engines is forecast to contribute over 70% of Melrose profit with over 85% of this being from the accretive and structurally growing aftermarket. The business has OEM-level capability and responsibility for selected engines which gives more technical and commercial advantages than normal for a Tier 1 supplier. The company is partner to all major engine OEMs with its lucrative and diverse Revenue and Risk Sharing Partnerships (RRSP) portfolio providing strong cash flow growth. In response to ongoing investor concerns (and valuation discount) regarding the accounting treatment of its RRSPs, the company has published a booklet which provides detailed information, highlighting how Melrose is positioned today, how the cash generation flows, and the accounting involved. The total expected lifetime future RRSP gross cash inflow is £22bn (and £6bn net), with 17 of the 19 RRSPs already in the cash generation phase.

In the first half of 2025, group adjusted revenue was up 6% on a like-for-like basis to £1,720m, a touch above the market expectation. Growth was 1% including exited businesses.

All end markets continue to grow structurally with rapidly increasing demand in Defence. The group generated continued strong execution and commercial progress despite supply chain and tariff disruption, the latter of which the company has been successful in largely mitigating. In Defence, the company has met its year-end target to reprice 85% of the portfolio six months ahead of plan.

The group’s multi-year transformation programme is nearing completion. This has been the key driver of margin expansion – in the first half, the adjusted operating margin increased from 14.2% to 18.0%, with good progression in both divisions. Operating profit (pre-PLC costs) rose by 29% to £310m, above the market forecast of £299m. EPS rose by 30% to 15.1p, versus the consensus of 14.3p.

In Engines, revenue grew by 11% to £781m, while margins rose by 400 basis points to 33.4%, driven by revenue growth and favourable mix. Looking ahead, the division is well placed to meet the ongoing industry ramp-up from its established positions as well as through new technologies.

In Structures, revenue grew by 3% to £939m, with the margin rising by 200 basis points to 6.7%. Performance was driven by good growth in Defence partially offset by Civil where revenue was flat, as expected. Restructuring programmes are on track and are nearing completion, which will result in a significant reduction in associated cash spend.

As expected, there was a free cash outflow in the first half, albeit at £54m, it was less than expected and substantially lower than the last year’s £145m. Looking forward, free cash flow is expected to ramp up sharply as a result of increased RRSP cash flows, operational improvements, and reduced restructuring cash spend as the transformational restructuring programme nears completion.

Melrose has a strong balance sheet with leverage at the end of the first half of 2.0x net debt to EBITDA, versus the target to be between 1.5x and 2.0x. Financial strength is driving attractive shareholder returns through a progressive dividend – a half-year payout of 2.4p has been declared, 20% higher than last year. The company is also undertaking a £250m share buyback programme expected to complete in March 2026, with £91m repurchased so far. There is potential for a sizeable cash return every year until the end of the decade. The company has reiterated that no material acquisitions will be made in the near term.

Guidance for 2025 remains unchanged on a constant currency basis and continues to exclude the direct and indirect impact of any new or changed tariffs. However, the company has updated its guidance to reflect the strengthening of sterling against the US dollar, representing a negative movement of 7%: Revenue of £3,425m-£3,575m and operating profit (adjusted EBIT pre-PLC costs of £30m) of £620m-£650m. The free cash flow target of more than £100m, second half weighted, remains unchanged.

In Engines, growth is stronger due to OE volumes and favourable mix, with operating profit guidance of £490m-£510m. In Structures, volumes continue to be constrained by broader, sector-wide supply chain issues which are expected to persist throughout 2025. Operating profit guidance is £160-£170m, supported by civil ramp, defence portfolio and pricing and business improvement actions.

Overall, the most significant contributor to future Melrose value is profitably capturing the growth from its established positions across civil and defence platforms, as production ramps and the aftermarket reads through. The company has reiterated its target for 2029: revenue of £5bn and operating profit (post PLC costs) of £1.2bn (i.e. 17% CAGR), margin up to 24%, and free cash flow of £600m and growing beyond. Growth will be driven by maturing engine RRSP portfolio, margin improvement at structures, and ongoing demand for parts.

Source: Bloomberg