The stock market has no sick bay. A company that struggles to keep up with competitors and fails to grow is prey not a patient.
Underperformance is not the only reason companies are targeted for takeovers, nor will every laggard elicit interest from a predator, but when a bid is unwanted, the target company must convince shareholders that it can improve performance itself if it wants to survive. Miner Anglo American successfully resisted a takeover attempt by BHP last year by implementing a radical restructuring plan similar to the one proposed by its pursuer. The new Anglo is now a work in progress.
Aerospace company Melrose is the product of a particularly bitter takeover battle for former UK engineer GKN. That business was in a tight spot and spewing out profit warnings when turnaround specialist Melrose pounced six years ago. Melrose, whose mantra was “buy, improve, sell”, won. It expanded the civil and defence aerospace business, which includes supplying parts for Chinook and Apache helicopters and US fighter jets, and spun off the non-aerospace divisions.
Takeovers have become a contentious issue for the UK with many high quality engineers, manufacturers and even defence companies snapped up in recent years. What’s unusual about Melrose is that in the end London has retained an industry champion. In contrast, the takeover of aerospace defence business Cobham in 2020, a pioneer of air-to-air refuelling systems, led to it being broken up into units and sold to US and French defence and technology companies.
Poor management may be part of London’s takeovers problem. After all, Tufan Erginbilgiç, Rolls-Royce boss, has demonstrated how recovery from a dire situation is possible. He’s been helped by air travel returning to normal and rising geopolitical tensions, but ultimately the transformation of Rolls-Royce owes much to the quality of his leadership.
BUY: Melrose Industries (MRO)
The shares were dragged down by profit-taking on results day, but the company’s prospects are increasingly attractive, writes Christopher Akers.
Melrose Industries shares were marked down by 10 per cent as investors took profits from their recent rally, after the aerospace giant reported annual profits at the top end of expectations, and raised its dividend by a fifth.
Adjusted operating profit rose 42 per cent to £540mn, while the margin improved by 4 percentage points to 15.6 per cent as the engines business surpassed its 28 per cent target a year early.
Revenue growth was driven by the engines unit, as it delivered a sales uplift of 26 per cent on a strong performance across parts repair, the defence after-market and portfolio of risk and revenue share partnerships. At the higher-revenue-but-lower-profit structures business, top-line growth of 3 per cent was stymied by supply chain constraints and customer destocking.
Management anticipates a “step change” in cash generation ahead as profits improve, restructuring costs conclude and cash outflows related to the powder metal issues with Pratt & Whitney’s geared turbofan (GTF) engines subside. Guidance is for positive free cash flow after interest and tax of at least £100mn this year, after an outflow of £74mn in 2024.
The improving picture was seen in the new five-year target for annual free cash flow of £600mn, alongside 2029 revenue of around £5bn and adjusted operating profit of at least £1.2bn.
Despite the tumble on results day, the shares are up by a third over the past six months. Investec analysts raised their target price from 735p to 1,000p and noted that the new targets imply an earnings per share compound annual growth rate of more than 20 per cent.
Melrose trades on 15 times forward consensus earnings for 2026, a rating well below its peer group.
BUY: Balfour Beatty (BBY)
There were positive outcomes for all three business segments of the infrastructure group, writes Mark Robinson.
Balfour Beatty ended 2024 with its order book 12 per cent to the good at £18.4bn, and with underlying earnings up by 17 per cent to 43.6p a share.
The group also boosted its net cash position by £101mn during 2024, leading to average net cash of £766mn, up from £700mn in the prior year. To round things off, management’s valuation of the group’s investment portfolio increased by 8 per cent to £1.3bn.
Growth was in evidence across all three segments, but support services provided the strongest returns, with operating profits up by 16 per cent to £93mn. Growth at construction services was more modest, with profits up 2 per cent to £159mn.
US construction profitability was constrained due to the cost of delays at a small number of civil projects, and financial performance was held in check due to an £83mn provision in relation to the group’s obligations under the UK Building Safety Act. The provision does not include potential recoveries from third parties, so Balfour Beatty, in common with industry peers, could be on the hook for related charges going forward. A further charge of £52mn was recognised in relation to a US civil project completed in 2012.
Domestic construction contributed 30 per cent of group revenues, while the US arm accounted for 36 per cent. There was also a rising contribution from the group’s Hong Kong joint venture with Jardine Matheson, but it’s worth pointing out that underlying margins at the UK construction arm are above the group average, a distinct improvement from last time around.
The improved order book was linked to power transmission work in the UK and a step-up in building orders in the US. Rising volumes in the power transmission and distribution sector are expected to bolster activity in support services, particularly in regard to contracts that are not reliant on direct government funding.
With an improving cash position, management felt able to bump up the final dividend by 9 per cent to 12.5p a share, and the group is also in the midst of a multiyear buyback programme, with share repurchases amounting to £125mn pencilled in for 2025.
It’s difficult to assess the likely impact, if any, because of political change in both the UK and US. But notwithstanding potential macroeconomic issues, and the wider impact of tariffs, the forward rating of eight times (ex-net cash) looks compelling given improved order visibility.
HOLD: Persimmon (PSN)
Macroeconomic factors could slow any nascent housebuilding rebound, writes Mark Robinson.
The UK government is relying on a revival in the new-build housing market to stimulate growth in the wider economy. And judging by Persimmon’s full-year figures, that scenario might not be quite as unlikely as recent economic statistics would have us believe. There is even speculation that the government is looking at whether a revival of George Osborne’s Help to Buy scheme in England is a realistic option given that many new homeowners were left in negative equity after the scheme distorted the housing market.
The scheme certainly helped to support profitability in the housebuilding sector, though you wouldn’t imagine that management at Persimmon spends much time pondering hypotheticals given the last noteworthy retracement in its share price petered out last October.
At the time of its last interim statement, we ventured that “UK housebuilders may be about to turn the corner after a couple of challenging years”, a conjecture that appears overly optimistic in hindsight. So we should be a little more circumspect, particularly given that persistent inflationary effects have damped prospects on the rate cut front.
Nonetheless, shareholders in the housebuilder will be encouraged by the 14 per cent increase in underlying operating profit to £405mn, combined with a 7 per cent uplift in completions to 10,664. What’s more, the order book has grown by 27 per cent to £1.15bn, which, combined with current sales activity, means that Persimmon now expects completion volumes to range between 11,000 and 11,500.
The order book continued to build up in the early part of 2025, aided by an increase in the number of outlets and the related net private sales rate. The group managed to secure detailed planning consent for 13,064 plots in the year, up by a fifth on the previous year and “significantly above industry trends”, according to management.
All this suggests that activity is indeed bubbling up, but affordability remains an industry-wide bugbear, as evidenced by the modest 3 per cent increase in the average selling price to £288,542, although the average rate increased on reservations as the year progressed, implying a degree of momentum on the pricing front.
Dean Finch, group chief executive, is encouraged by the government’s “planning reforms and pro-housebuilding agenda”, although the affordability issue with new-builds in the UK is likely to be exacerbated by the aggregate increase in taxation across the economy, which is already having a cooling effect on the jobs market (never a plus point where potential mortgagees are concerned). Little wonder that Finch said the group is confident of growing margins, returns and shareholder value “over the medium term”.
