Broker snap: Increased cash return possible at Melrose, says Investec

3rd Jun 2013 09:48

Investec has reiterated its 'buy' rating and 300p target price for manufacturing conglomerate Melrose after the company confirmed that it is looking at the possible sale of its Crosby and Acco lifting divisions.The broker said that the Melrose's business model is buying, improving and selling undervalued businesses, and the company is now in the process of "reaping value" from the FKI acquisition in 2008.While Melrose only said that it is "considering the possible sale" of the two units, Investec hopes the disposals could be completed by the end of 2013.Analyst Chris Dyett had previously estimated that Crosby would be worth £550m in his sum-of-the-parts valuation of Melrose based on multiples of operating profit. Therefore, rumours of a value closer to $900m (around £600m) "would represent upside to our assumptions and a good premium (approximately double) on the implied value that Melrose paid for Crosby as part of FKI," he said.Dyett added that at this price - "and assuming that the group is comfortable with an ongoing 2.25 times net debt-to-EBITDA (earnings before interest, tax, depreciation and amortisation) ratio" - the cash return to shareholders could increase to 50p per share, or around 19% of the current share price. This is higher than Investec's previous 45p-a-share estimate.The stock was down 1.84% at 256.6p by 10:12 on Monday.