MARKET REPORT: Microchip shortage slams brakes on Melrose Industries

Turnaround specialist Melrose Industries was on the back foot as it became the latest company to be hit by a global shortage of semiconductors.

The FTSE 100 group, which specialises in buying under-performing companies, improving them and selling them on, is a key supplier to the car industry through Worcestershire-based drive shaft engineer GKN, which it acquired for £8billion in 2018. 

It also supplies small components such as door fasteners through its powder metallurgy business.

Slowdown: Turnaround specialist Melrose is a key supplier to the car industry through Worcestershire-based drive shaft engineer GKN, which it acquired for £8bn in 2018

In a trading update, it said demand from car manufacturers continued to be above pre-pandemic levels.

But the supply chain crunch means around 25 per cent of these orders are being cancelled each month because manufacturers cannot get hold of crucial microchips – causing them to cancel other orders. In more normal times, just 1 per cent of orders are cancelled.

Melrose added that the supply issues would last longer than initially expected, although the timing and duration of the disruption continued to be ‘uncertain’. 

Semiconductors are key components in car manufacturing as they are used to operate features such as power steering, emergency braking systems and parking cameras.

Stock Watch – Inspiration Healthcare

Inspiration Healthcare bounced higher after half-year profits more than doubled.

The company, which specialises in neo-natal care, said profits for the six months to August had soared 140 per cent year-on-year to £2.6million, while revenues jumped 47 per cent to £20.9million.

As a result of the strong performance, company chairman Mark Abrahams said the firm’s profit expectations for its full year ‘have increased’, citing strong margins as well as the integration of baby ventilator maker SLE, which Inspiration bought for £18m last year.

The shares surged 8.1 per cent, or 9.5p, to 127p.

Melrose was not alone in sounding the alarm, with the Society of Motor Manufacturers and Traders (SMMT) warning that the lack of semiconductors was becoming ‘more severe’ and causing bottlenecks in vehicle production lines both in the UK and overseas.

The issue has been compounded by the pandemic, which not only caused some semiconductor makers to shut down but also sparked a surge in demand for electronics such as games consoles and smart kitchen appliances, which also use semiconductors to operate. 

However, Melrose boss Simon Peckham said that while the semiconductor shortage was ‘frustrating and difficult to plan for’, he did not see it impacting the business’s value in the long term.

Shareholders seemed to disagree, with the shares dropping 1.1 per cent, or 1.85p, at 169.05p.

The FTSE 100 moved up 0.94 per cent, or 66.09 points, to 7077.1 while the FTSE 250 was lifted 0.33 per cent, or 75.73 points, to 22730.65.

Traders appeared to shrug off data that showed how the effects of supply chain disruption were rippling across the economy, with the latest composite PMI readings showing services firms had raised prices at their fastest pace on record in September.

Banks helped push the blue-chip index higher, with Barclays rising 3.9 per cent, or 7.32p, to 194.6p after analysts at Credit Suisse said the firm’s investment banking division pointed to ‘further market share gains’ and upped their target price to 220p from 218p.

Meanwhile, rival Lloyds climbed 3.8 per cent, or 1.72p, to 46.52p as Credit Suisse said they expected the black horse bank to announce a £1billion share buyback in its full-year results next February.

Other lenders were also on the up, with Standard Chartered adding 3.1 per cent, or 13.1p, to 441.8p while Natwest climbed 3.1 per cent, or 6.8p, to 229.8p and HSBC jumped 2.3 per cent, or 8.8p, to 393p.

Shell and BP shares were supported by rising oil prices as Brent crude rising to over $83 a barrel after the Opec cartel decided not to increase production, maintaining a tight supply. 

Shell was up 2.2 per cent, or 36.6p, to 1707.4p while BP added 1.8 per cent, or 6.2p, to 350.65p.

JD Sports climbed 3.3 per cent, or 34.5p, to 1069p after it unveiled plans for a stock split.

The sportswear retailer said shareholders will receive five new shares for each one they already own, a move it said will reduce its share price to a level that will make smaller deals ‘more efficient’ and improve their liquidity and marketability. 

The decision followed a strong run for the company’s stock, which has increased by 35 per cent over the last 12 months.

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