Q1 trading at GKN has been in line with management expectations. In Automotive, Driveline gained market share, with 4% organic growth against industry volumes 1% ahead. Powder Metallurgy saw a 2% organic sales decline. Land Systems continues to suffer from weak agricultural machinery markets, leading to 6% organic sales declines. GKN Aerospace saw flat sales on an organic basis, although reported sales rose by £178m, largely due to the contribution from newly acquired Fokker. The shares slipped a couple of pence in early trading.
GKN is fast becoming an aerospace-oriented company. The acquisition of Volvo Aerospace a few years ago, and more recently, 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 fifth of their value over the last year. The outlook for the Aerospace division seems rather muted in the near term, 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.
Q1 trading detail:
Underlying Group sales of £2,179m were 12% higher (2014: £1,943m) representing organic growth of 1%, 8% from acquisitions and a 3% benefit from FX. Group trading margins are lower than last year, principally because Fokker, acquired last year, earns lower margins that GKN's existing Aerospace businesses.
GKN Aerospace saw lower business due to the reduced production rate of Airbus A330s, offset by growth in other civil airliners. Military sales were lower, due to declining production volumes of F/A-18 Super Hornet fighter jets and UH-60 Black Hawk helicopters. Fokker's integration is proceeding to plan.
GKN Driveline benefitted from new programme launches in Europe and continued above-market demand for premium vehicles like 4x4s which have a higher GKN-content per vehicle. Exposure to light trucks in the USA proved to be a drag on performance. In Asia, Chinese demand is shifting from premium vehicles toward more basic models, but the Thai business saw strong demand of 4x4 components.
CEO Nigel Stein commented "...customers continue to award us good levels of new and repeat business. We expect to grow in 2016 and beyond, helped by the contribution from Fokker".
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