UBS has downgraded its rating for industrial manufacturing conglomerate Melrose from 'buy' to 'neutral' one day after the company's full-year results, highlighting issues with the core divisions.

The firm yesterday reported that revenues rose by a half in 2012, helped by last year's acquisition of gas metering group Elster, which now accounts for some 45% of sales.

UBS was upbeat about the division, which is "surprising to the upside" with margins already ahead of expectations and the revenue outlook better than the market anticipated.

However, as UBS explained, if Elster is excluded core Melrose's orders were down 11% from the first half to the second.

The broker said: "Given run-rates were only down 8.0% sequentially at the November interim management statement, it implies very weak momentum in the last two months of the year.

"The industrial cycle should pick up quickly and help Bridon & Crosby, where orders took a sharp leg down, but we will have to wait longer for Brush Turbo generators to turn a corner. With orders now subduing revenue progression we downgrade to 'neutral'."

UBS said that core Melrose (excluding Elster) needs to see an 8-9% increase in order input against the second half of 2012 in order to meet the broker's sales estimate for 2013.

"This leaves much to do".

The target price has been raised from 260p to 275p.

Shares were down 2.7% at 259.9p by 10:01 on Thursday.

BC

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