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GKN - Slow and steady

Equity research team | 25 October 2016 | A A A
GKN - Slow and steady

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Slow and steady

GKN announced a 21% increase in sales for the nine months to the end of September, including organic sales growth of 2%, in line with management expectations. The shares fell 2% in early trading.

Our View

GKN is an increasingly aerospace-oriented company. The acquisition of Volvo Aerospace a few years ago, and more recently, the addition of Fokker, makes Aerospace 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 (Land Systems will cease to exist as a division from January 2017). But in the meantime, there is the pension fund deficit to hold the group together. At over £2bn, this isn't trivial and GKN should be considered as rather more leveraged than a cursory glance at the net debts of £918m 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 10.5x consensus EPS forecasts, which is well below the rating of many other UK industrials. But that ratio takes no account of the deficit.

Driveline continues to look robust while the outlook for the Aerospace division seems rather muted in the near term, with mature contracts coming to an end, particularly among military clients. However, by the end of the year Aerospace margins should be improving as Fokker is integrated, while cost cuts elsewhere in the business will also help the bottom line.

As with much of GKN, the dividend is reasonable but unexceptional, offering a prospective yield of 2.9%. The future should be brighter, but GKN is going nowhere fast.

Third Quarter Trading Statement

Management sales to the 30 September 2013 were £6,895m (2015: £5,683m). This 21% increase comprised £151m (2%) organic growth, acquisitions of £587m, and currency benefits of £474m.

Margin was, as expected, lower than a year previously. Following the commencement of a £35m restructuring programme and the inclusion of the lower margin Fokker Technologies business. Operating cash flow remains similar to the previous period.

GKN Aerospace - Sales of £2,496m. Organic sales grew 2%, boosted by increased production of the A350, A320 and Boeing 737, with additional currency benefits of £126m

GKN Driveline - Sales of £3,075m. Organic sales grew 6%, against industry growth of 4%, with additional currency benefits of £238m

GKN Powder Metallurgy - Sales of £762m. Organic sales were flat, with currency tailwinds of £64m

GKN Land Systems - Sales of £534m. Organic sales declines 8%, partially offset by a £44m currency tailwind

CEO, Nigel Stein, commented;

"In line with the global economic outlook, we see growth rates easing in our major markets... Despite the slightly tougher macro-economic environment, the Group continues to expect 2016 to be another year of growth."

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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 for more information.