UPDATE 1-Investment firm Melrose H1 profit fuelled by Elster business

Thu Aug 28, 2014 3:31am EDT

(Adds details, dividend, analyst comment)

Aug 28 (Reuters) - British investment firm Melrose Industries Plc reported a rise of 8.5 percent in half-year pretax profit, bolstered by strong performance in its biggest revenue-generating unit, Elster.

But weakness in the mining sector was hurting its remaining FKI businesses of Brush and Bridon, the company said. ID:nRSb1811Qa]

Headline operating margin in Elster, which makes consumption meters, rose 2.9 percentage points to 18.9 percent, making the business Melrose's most successful acquisition to date.

Melrose, which follows a private equity model of 'buy, improve and sell', acquired the 100-year-old Elster engineering group for 1.8 billion pounds in 2012.

"We believe the improvement at Elster clearly demonstrates the potential upside from the next deal," JPMorgan Cazenove said in a note to clients.

The brokerage reiterated its overweight rating on Melrose and raised its price target on the stock to 333 pence from 330 pence.

Pretax profit for the six months ended June 30 increased to 69.6 million pounds ($115.49 million) from 64.1 million pounds a year earlier.

First-half revenue slumped 11 percent to 780.9 million pounds, dented by the impact of a stronger pound on Melrose, which generates more than 85 percent of its revenue from outside the UK.

Melrose said it would pay an interim dividend of 2.8 pence from 2.75 pence last year.

The engineering turnaround specialist's shares were up 1.2 percent in early trading on Thursday.

($1 = 0.6027 British Pounds) (Reporting by Aashika Jain in Bangalore; Editing by Feroze Jamal)