Menu Menu Menu Login Login Log in Search Search Search

GKN - Shares fall on unexpected 40m pound bill

Nick Hyett | 13 October 2017 | A A A
GKN - Shares fall on unexpected 40m pound bill

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

GKN plc Ordinary 10p

Sell: 318.20 | Buy: 318.50 | Change 15.00 (4.94%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

In an unscheduled trading update, GKN announced it was expecting to take a £40m charge in the fourth quarter relating to two "external claims" - one in Aerospace and one in Driveline. Further details are unavailable at this time.

Full year profits before tax are now expected to be only slightly above last year, leading the shares to fall 8.4% in early trading on 13 October.

Our view

Detail on what actually lies behind these "external claims" is thin on the ground at the moment, but they are certainly unwelcome. £40m is equivalent to 5% of last year's operating profits, and looks set to wipe out any profit growth in 2017.

However, one-off charges like this wouldn't normally be a great concern to us, these things happen from time to time and shareholders would still benefit from underlying profit growth in the years ahead. The problem is that the charges have sprung out of nowhere, raising concerns there could be more nasties hiding under the stairs.

That margins in the aerospace business, which generates annual sales of £3.4bn, are struggling will be adding to shareholder pain this morning. Fortunately the large automotive divisions continue to perform well. Investments in electric drivechains is weighing on margins at the moment, but is vital to manage a transition to electric vehicles.

In the long term, the pressure will mount for GKN to do the splits, with Aerospace and Automotive going their separate ways. At present though the £1.8bn pension fund deficit binds the group together. With that in mind, GKN should be considered more leveraged than a cursory glance at the net debts of £700m would suggest.

The stock is not highly rated, partly as a result of the pension-induced de facto leverage, and partly because of the exposure to the volatile automotive market. Currently, GKN trades on 10.1 times next year's earnings, which is below the rating of many other UK industrials.

Assuming that no more "claims" appear out of the blue, a low rating could make the group attractive, especially if it's able to deliver on its medium term promises. Driveline growth remains robust, while increased defence spending should support the Aerospace division. The group has as yet been unable to convert cost savings into margin gains, but it's still early days.

As with much of GKN, the dividend is reasonable but unexceptional, offering a prospective yield of 2.85%. GKN is a solid business, but until it sorts out the pension situation, it's unlikely to be going anywhere fast.

Register for updates on GKN plc

Sign up to receive our free weekly share insight email

Third Quarter Trading Update

GKN Aerospace saw sales in commercial aerospace slow slightly in the quarter, with military sales ahead of the prior year.

However margins in the division have been "disappointing", as operational challenges, pricing pressure and the end of certain programmes all weighed on performance. These headwinds will continue into the fourth quarter, although will be offset by a one-off retrospective pricing adjustment of £20 million.

By comparison, the performance of GKN Driveline has been good, with sales well ahead of 2% global automotive growth. Even including the impact of the Q4 claim, Driveline's margin is expected to be similar to last year.

Organic sales growth continued at GKN Powder Metallurgy, despite a decline in US automotive production rates, as it continued to benefit from currency translation and acquisitions in China and Turkey. Growth includes passing higher raw material prices on to customers, which also reduces reported margins slightly.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

All yield figures are variable and not guaranteed. The information in this article is not intended to be advice or a recommendation to buy, sell or hold any investment mentioned, nor is it a research recommendation. No view is given as to the present or future value or price of any investment, and investors should form their own view in relation to any proposed investment.

View the GKN plc factsheet

Register for free GKN plc email updates