November 19, 2013 2:49 pm

Melrose Industries detects signs of stronger 2014

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Melrose Industries’ chief executive has signalled a more positive outlook for 2014, after the London-listed engineering turnround specialist reported stronger order intake across its utility meter business.

The FTSE 100 engineer on Tuesday said trading since July has been in line with expectations, with Elster, the German manufacturer of utility meters it purchased last year for £1.8bn, continuing to perform strongly.

Elster’s meters measure and control the supply of electricity, gas and water in 130 countries. Melrose said order intake at Elster’s electricity business was up 14 per cent compared with last year, as it positions itself to become a leading supplier of so-called “smart” meters that use computer intelligence to help consumers and industrial groups save energy.

It also reported a 4 per cent rise in sales of Elster’s water meters, and a 2 per cent rise in orders, compared with last year, while sales in its gas business were up 8 per cent.

“We’re pleasantly confident, mildly happy if you like,” said Simon Peckham, who took over as chief executive of Melrose last year.

Melrose said there were also early signs of improvement in its Energy division, which has had a tough sales environment over the past 12 to 18 months, with customer inquiries increasing.

However, while orders were up compared with last year, the group cautioned about reading too much from what was a relatively short period in the energy cycle.

“We’re starting to see an uptick in orders and our customers are saying much more pleasant things about 2014. That can always change, but at the moment they are being optimistic,” said Mr Peckham.

The FTSE 100 engineer operates a private equity-like business model, buying industrial companies, improving their performance and selling them off within three to five years at a profit before returning much of the cash to shareholders.

The group has sold off four such businesses during the past year. Last month, it announced the sale of Crosby, a Tulsa-headquartered maker of lifting systems for the oil and gas sectors, and Acco Material Handling, a smaller equipment maker in Pennsylvania, for £627m including debt to KKR, the New York-based buyout group.

The disposal, expected to complete shortly, will result in the return of about £600m to shareholders early next year. It will also mean Melrose is likely to fall out of the FTSE 100 index, although Mr Peckham said he was not concerned by this.

“Part of our model is you grow and you shrink, you grow and you shrink. Our job is to make money for our shareholders and that involves shrinking the business too,” he said.

It is looking for its next acquisition, on which it expects to spend between £1bn-£3bn. However, it said it had not yet identified any particular targets.

The group said current exchange rates would cause a “headwind” of about 2 per cent to profit for next year.

Analysts said the interim management statement was “encouraging”. “Although revenue growth remains challenging, management see early signs that 2014 may be a better backdrop to deliver sales growth,” said Andrew Wilson, analyst at JPMorgan Cazenove.

Shares in the Warwickshire-based company edged slightly down to 303.9p.

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