Melrose Industries PLC (LSE:MRO, OTC:MLSPF) shares surged on Tuesday after Citi analysts laid out forecasts for the aerospace manufacturer's free cash flow to surpass expectations ahead.
Citi noted a recent update from Melrose on its risk and revenue-sharing partnerships (RRSP) was “key” to understanding the company’s cash and profitability.
Melrose had provided an explainer on such partnerships with aircraft engine makers, which are paid based on flight times, late last month.
Some 17 of Melrose’s 19 deals were now cash-generating, the company said at the time, relating to the likes of engine mounts and cases.
Citi estimated Melrose’s free cash flow could sit in the region of £450 million to £550 million come 2028 on the back of the update, against consensus for £320 million to £420 million.
This would give a valuation of £6 to £8 for the shares, Citi added, reflecting a near-30% upside on Monday’s close at the low end.
“We remain high conviction in the buy case given the trough multiple and the strong mid-term cash outlook,” Citi said.