Will Melrose’s Cash Discipline and Aftermarket Strength Power the Next Leg of Growth?

The aerospace recovery that began in 2023 has entered a new, more selective phase. With supply chains still tight and tariffs pressuring costs, manufacturers are focusing less on volume and more on disciplined growth. Within this backdrop, Melrose Industries (MRO) has emerged as one of the UK’s most successful industrial turnarounds, transforming from a diversified conglomerate into a focused aerospace pure play built on efficiency, technology, and high-margin aftermarket exposure.

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Melrose now operates two core divisions, Engines and Structures, supplying nearly every major commercial and defence aircraft platform worldwide. The company’s first-half 2025 results highlighted its progress: group revenue rose 6% to £1.72 billion, operating profit surged 29% to £310 million, and margins expanded 380 basis points to 18%. That performance came despite supply chain headwinds and tariff friction, reflecting how far its multi-year transformation has progressed.

With restructuring set to complete by year-end 2025 and margins forecast above 19% for the full year, Melrose’s pivot from acquisition-led growth to operational compounding is well underway. Management expects free cash flow of more than £600 million by 2029 and operating margins of more than 24%. For investors, the company’s execution through turbulence underscores the strength of its redefined model, asset-light, cash-generative, and tightly aligned with the long-term growth of global aerospace and defence markets.

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Financial Story

Melrose’s first half of FY2025 delivered another step forward in its aerospace transformation as group revenue climbed 6 percent to £1.72 billion, driven by 11 percent growth in the engines division and steady demand across defence and civil aerospace platforms. Adjusted operating profit surged 29 percent to £310 million, lifting margins to 18 percent, a company record, as restructuring benefits and pricing gains flowed through.

While cash flow remained slightly negative in the first half at £54 million, it improved markedly from the prior year, thanks to tighter working capital control and lower restructuring charges. Management reaffirmed full-year guidance for over £100 million in free cash flow, setting the stage for significant inflows in the second half as inventories normalize and high-margin aftermarket sales accelerate.

Melrose also strengthened its shareholder proposition: the interim dividend rose 20 percent to 2.4 pence, and £71 million of share buybacks were completed with another £150 million scheduled through 2026. Leverage remains modest at 2.0x EBITDA, preserving headroom for future returns. Taken together, the numbers confirm a business that’s transitioned from turnaround to structural compounding, small in relative scale, but world-class in efficiency.

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Broader Market Context

Global aerospace is entering a period of renewed capital investment and constrained supply. Aircraft production is still lagging demand as OEMs work through labor shortages and component bottlenecks, forcing airlines to extend the lifespan of existing fleets. This environment favors suppliers with intense aftermarket exposure, pricing power, and operational discipline, traits that are now defining the most profitable phase of the aerospace recovery.

For the U.K., Melrose has become a standout case of industrial reinvention. Once known for its “buy, improve, sell” model, the company has transformed into a focused aerospace pure-play with structural advantages in both the civil and defense markets.

With long-term contracts tied to major engine platforms and multi-year visibility on cash generation, Melrose’s trajectory reflects a broader shift in manufacturing, from cyclical recovery stories to high-margin, cash-generative compounders.

1. Engines Drive Profit and Margins

Melrose’s Engines division continues to power the group’s profitability, accounting for more than 70 percent of operating profit in the half. Revenue grew 11 percent year-over-year, while operating profit rose 26 percent to £261 million. Margins expanded 400 basis points to 33.4 percent, reflecting improved aftermarket mix and sustained pricing discipline.

The division’s exposure to global flight hours offers a long runway for growth. Aftermarket activity climbed 15 percent as airlines continued to recover utilization, while 17 of 19 risk- and revenue-sharing partnerships (RRSPs) are now cash-positive. This gives Melrose recurring, high-margin income across multiple engine platforms, including Rolls-Royce’s Trent series and GE’s GEnx.

Management expects continued momentum as new aircraft deliveries catch up to record order backlogs. With global flight hours forecast to grow 6 percent annually through 2030, Engines is positioned to compound cash flows for years, effectively the group’s profit engine in both name and reality.

2. Structures Division Nears Completion of Transformation

The Structures division, once a drag on group performance, is steadily becoming an asset. Revenue rose 3 percent to £939 million, while operating profit climbed 32 percent to £63 million, lifting margins from 5.2 percent to 6.7 percent.

After several years of site consolidation and contract repricing, 85 percent of the defence portfolio is now secured under long-term inflation-protected agreements. Civil aerospace volumes remain constrained by supply shortages, but that’s being offset by higher defence demand and business jet activity. The cost base has also been sharply reduced, with the division consolidating more than 500 sites to just 32.

With restructuring due to finish by late 2025, Structures is expected to achieve margins of roughly 9 percent by FY2026. At that point, both divisions will be operating at near-steady-state profitability, a crucial milestone that should allow Melrose to shift its focus from restructuring to organic margin growth and consistent free cash flow delivery.

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3. Cash Flow, Efficiency, and Long-Term Targets

Melrose’s balance sheet discipline remains one of its defining strengths. Free cash flow improved by £91 million year-on-year, and management reaffirmed its goal of generating £600 million annually by 2029, an ambitious target supported by rising operating margins and reduced capital intensity. The company’s 18 percent margin today already surpasses the levels it once achieved as a diversified group, and guidance calls for more than 24 percent by the end of the decade.

A key advantage is the aftermarket mix. Roughly two-thirds of group operating profit now comes from recurring maintenance, repair, and overhaul activities, insulating Melrose from OEM production volatility. That shift to recurring revenue is what differentiates it from peers and underpins its robust cash conversion.

Capital allocation remains disciplined: dividends are expected to grow steadily, buybacks will continue through FY2026, and leverage will trend toward 1.5x EBITDA over time. Melrose’s management has also hinted that once the structure’s turnaround is complete, future capital returns could expand meaningfully, potentially making it one of the FTSE’s most cash-productive industrials by the late 2020s.

The TIKR Takeaway

Melrose’s transformation is nearly complete, and the results speak for themselves. Once a collection of cyclical manufacturing assets, the company now operates a streamlined, high-margin aerospace group aligned with long-term structural tailwinds in global aviation and defence.

The margin story still has room to run, cash generation is accelerating, and visibility through RRSP partnerships gives Melrose one of the most predictable earnings trajectories in the sector. If management delivers on its 24 percent margin and £600 million cash flow targets by 2029, Melrose could join the ranks of Europe’s premier compounders.

Should You Buy, Sell, or Hold Melose Industries’ Stock in 2025?

Melrose remains a clear Buy for investors seeking high-quality industrial exposure to the aerospace recovery. At around 15x forward earnings with mid-teens EPS growth potential, the stock still trades below global peers despite stronger cash visibility and margin expansion.

The company’s transition from “buy, fix, sell” operator to long-term compounding manufacturer is one of the UK market’s most successful reinventions. For investors, the next few years should deliver less drama, but far more consistency.

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Disclaimer:

Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any stocks mentioned. Thank you for reading, and happy investing!