On Friday, Morgan Stanley initiated coverage on Melrose Industries PLC (MRO:LN) (OTC: MLSPF) stock with an Equalweight rating and a price target of GBP5.00.
The financial firm highlighted the importance of cash as the main focus for investors in Melrose due to the complex nature of the company's Risk and Revenue Sharing partnerships (RRSPs).
The analysis by Morgan Stanley took into account the intricacies of RRSPs, which can cause differences in the timing of revenue and cash recognition. According to their estimates, approximately 45% of Melrose's group profitability is based on variables.
The firm conducted a cash mountain analysis using a proprietary Net Present Value (NPV) model and concluded that the company's guidance for the RRSP cash mountain at £5.7 billion is reasonable.
Morgan Stanley's report also points out that Melrose's cash sensitivity to working capital fluctuation is very high. However, their scenario analysis indicates that the company's structural growth is strong when detailed estimates by segment are considered. The firm anticipates that Melrose could outperform if the timing of cash generation is favorable.
The report further suggests that a better cash profile for Melrose is likely post-2026. This projection is supported by the aftermarket narrative and the expectation that one-off headwinds will have subsided. Despite this, Morgan Stanley maintains a cautious stance, noting that evidence of the company entering a cash generation phase is needed.
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