GKN owner Melrose hit by mass cancellations from automotive clients as chip shortage reverberates down production chain
- Monthly cancellations rise from average 1% rate to ‘approximately 20% to 25%’
- Global chip shortage eats away at British parts supplier’s automotive business
- But the firm reported improved performance from its aerospace business
Shares in British parts supplier Melrose Industries sank this morning after the company revealed that its automotive clients are cancelling orders at 25 times the rate seen earlier this year.
The owner of GKN, which supplies parts to carmakers such as Volkswagen, said the ‘in-month’ cancellation from automotive customers has risen from a normal rate of 1 per cent to ‘approximately 20 per cent to 25 per cent’.
It comes as the global auto industry remains engulfed in a chip shortage exacerbated by the pandemic.
Global chip shortage hurts Melrose’s automotive business but the firm reported improvement in aerospace division
Chief executive Simon Peckham said: ‘Tightened supply of semiconductors to the automotive industry are frustrating and difficult to plan for, but whilst they affect current trading, they don’t impact long-term value, particularly as cash is well controlled and debt reduced.’
The company added that while the ‘timing and duration of these constraints is uncertain’, it is ‘confident that the scale of the impact on profitability from any revenue adjustment is in line with previous guidance’.
‘As an inflationary environment returns, all of the businesses are focused on the recovery of their costs and will take whatever actions are necessary to do so.’
Shares in Melrose Industries jumped in September after the group posted a decent set of interim half-year results and vowed to keep dishing out bumper returns to investors.
The FTSE 100-listed company reported an adjusted operating profit of £223million for the six months to the end of June, against a loss of £11million a year ago.
Despite losses of £151million for the period, Melrose announced it would be paying out an additional 15p a share dividend to shareholders, on top of its 75p a share interim dividend.
But the firm reported on Tuesday it had seen improvement in the aerospace end markets between June and October, with revenue being 16 per cent higher than the same period last year.
‘The aerospace business continues to improve its performance through restructuring, and we expect the pace of this to further pick up during the second half,’ it said.
Melrose shares fell 2 per cent in morning trading to 167.6p per share. They are down 14.9 per cent year-to-date.
Peckham added: ‘All internal management actions are on track, and many are ahead of plan. We are very pleased with the internal progress being made.
‘We have made our businesses better, more flexible and resilient to deal with near term headwinds, and all our businesses are on track to achieve their margin targets assuming partial end market recoveries.’