GKN shares fell 3% after the announcement of results that were broadly in line with expectations but accompanied by a somewhat muted outlook statement. Sales grew 2% organically and trading margins, excluding newly acquired Fokker, were stable at 9.2%. On GKN's own preferred measure of underlying performance, profits were flat at £603m, earnings per share were slightly reduced, reflecting the acquisition costs of Fokker and higher tax rates. The full year dividend rises 4% to 8.7 pence per share.
GKN is fast becoming an aerospace-oriented company. The acquisition of Volvo Aerospace a few years ago, and now the addition of Fokker has made Aerospace division look like a substantial business in its own right.
Sooner or later, the pressure will mount for GKN to do the splits, with Aerospace and Automotive going their own separate ways. But in the meantime, there is the pension fund deficit to hold the group together. At £1.5bn, this is not a trivial issue and GKN should be considered as rather more leveraged than just a cursory glance at the net debts of £769m would suggest.
The stock is not highly rated, as a result of both this de facto leverage, and also the volatility of automotive demand historically. Currently, GKN trades on less than 11x consensus EPS forecasts, which is well below the rating of many other UK industrials. But that ratio takes no account of the deficit.
The shares have been dullards of late, losing around a quarter of their value over the last year. The outlook statement for the Aerospace division is frankly uninspiring, and whilst Driveline is looking robust, the Land Systems division continues to drag. In a year's time, the Aerospace business should be through the programme transitions, be well advanced on restructuring and integrating Fokker to raise its margins and the picture should look brighter. On the dividend just announced, investors can expect a running yield of circa 3% to tide them through until then.
GKN Aerospace saw civil sales rise 6% but military revenues declined by 9%. New business of $3.5bn was won, for delivery in future years and margins were slightly lower, before the impact of Fokker.
GKN Driveline saw 5% organic sales growth, well ahead of global auto production as content per vehicle rose. Margins edged higher to 8.2% (2014: 8.1%) and annualised new and replacement business of £880m was won.
Powder Metallurgy saw margins rise from 11% to 12% and the business saw £185m of new or replacement business won. A Chinese JV was agreed in principle.
Land Systems got no easier, with sales down 6% in challenging agricultural and construction markets. Margins were 3.5% (2014: 5.7%) after incurring £11m of restructuring costs. £110m of new and replacement business was won.
GKN expect aerospace markets to be slightly down in 2016, reflecting the transition from older to newer programmes. Before Fokker, GKN expects broadly flat sales. Driveline and Powder Metallurgy are both expected to grow faster than the overall market growth of 3% that GKN expects to see. Land Systems will see a further sales decline. The addition of Fokker's earnings should help GKN to achieve a year of good growth.
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