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Melrose warns chip shortage to hit auto business after strong recovery

By Reuters

By Yadarisa Shabong

(Reuters) -Britain’s Melrose Industries warned on Thursday its growth would be hit by a shortage of chips in the automotive supply chain as it recorded a rise in sales so far in 2021 thanks to a recovery in demand for cars and powder metals.

The owner of GKN. Which supplies parts to carmakers such as Volkswagen, said it was performing modestly ahead of its expectations, with sales for the four months ended April 30 up 8%.

Shares in the FTSE 100 company, which have continued to lose value this year after a 25% fall in 2020, rose 2.5% in early trade.

For the four month period, automotive business sales were up 28% year on year but were down 13% on 2019, it said, adding that there would be a deferred impact on growth rates due to the shortage of chips.

Global automakers such General Motors, Ford Motor and Volkswagen AG have scaled back production to deal with the shortage as the industry has increasingly become dependent on chips for everything from computer management of engines to driver-assistance features.

The pandemic has spurred demand for consumer electronics and led to severe competition with automakers for chips globally. Sanctions against Chinese tech companies further exacerbated the crisis.

Melrose’s aerospace division, which had been hit hard by the pandemic, squeezed out a modest profit in the first-quarter compared with a loss last year helped by cost cuts, it said.

The company last month agreed to sell its Nortek Air Management business for about 2.62 billion pounds ($3.64 billion) and plans to use the proceeds to pay down debt, reduce a UK pension deficit and return cash to shareholders.

“The underperformance year to date provides a buying opportunity for a stock where the upside we expect the group’s assets to deliver for shareholders is clearly underpriced,” J.P. Morgan analysts said in a note.

($1 = 0.7194 pounds)

(Reporting by Yadarisa Shabong in Bengaluru; editing by Sherry Jacob-Phillips and Jason Neely)