Numis downgrades Melrose to 'reduce', sees downside risk

5th Mar 2014 09:24

Numis Securities has downgraded its rating for industrial conglomerate Melrose from 'hold' to 'reduce', saying it sees downside risk to the current share price despite the company's strong annual results on Wednesday.Analysts pointed out that the stock is the second most expensive in the UK engineering sector after Rotork.Melrose's headline profit before tax totalled £226.1m in 2013, up from £117.9m the year before and 1% ahead of Numis' forecast, helped by a full year's contribution from Elster, the gas, electricity and water metering company acquired in 2012.The group, which also streamlined other operations during the year through the disposal of five businesses from the FKI acquisition in 2008, said it is now "ready and keen to buy again"."Melrose's strategy and record of generating shareholder returns has been impressive and we remain long term supporters of the group," said Numis analysts David Larkam and Scott Cagehin.However, they said that the market's focus is now on the next acquisition and the stock's already "heady" rating "appears to already be discounting the next deal"."No deal today should be of little surprise given the difficulty in aligning such timings. However, competition is no doubt increasing with corporates and private equity in particular more confident and able to access funds. Melrose has always been rightly disciplined on pricing. We wait to see how this conundrum plays out," the analysts said.Numis has a 290p target price on the stock.Melrose was trading 8.4% lower at 300.5p by 09:55.BC