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GKN - Automotive drives good organic growth

Nicholas Hyett | 26 April 2017 | A A A
GKN - Automotive drives good organic growth

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First quarter trading at GKN revealed good organic sales growth, supported by an ongoing currency tailwind.

However, the shares fell slightly in early trading as the group warned that, while it still expects to see growth in the year ahead, its recent growth rates may not be sustainable in the face of tougher comparators.

Our View

GKN is steadily increasingly its aerospace exposure. 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. But in the meantime, there is the £2bn+ pension fund deficit to bind 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 volatility of automotive demand. Currently, GKN trades on less than 10.4x consensus EPS forecasts, which is below the rating of many other UK industrials.

The outlook for the business seems pretty good in the medium term. Driveline growth remains robust, while increased defence spending should support the aviation division, with Donald Trump eyeing a $54bn increase in US defence spending. At the same time cost savings across the business should boost margins, helping those additional revenues drop through to the bottom line.

As with much of GKN, the dividend is reasonable but unexceptional, offering a prospective yield of 2.5%. GKN is a solid business, but until it sorts out the pension situation, it's unlikely to be going anywhere fast.

First Quarter Results

Trading margin in the first quarter improved on last year thanks to improvements at GKN Driveline, despite raw material inflation in both Driveline and Powder Metallurgy. Operating cash flow was similar to the equivalent period last year.

Organic sales at GKN Aerospace increased modestly. Production of new commercial aircraft just offset cuts to the A380, Boeing 777/747 and business jets. Military sales grew following the ramp-up of the F-35 Lightning II and stable production levels in older programmes.

GKN Driveline sales growth outstripped global industry production rates, which were up 6%, although industry forecasts suggest full year automotive production will rise only 2%. Constant velocity joints have made a good start to the year while the all-wheel drive business is progressing well, particularly in the US and China.

GKN Powder Metallurgy saw organic sales growth in line with global auto production rates, benefitting from currency translation and last year's Chinese powder manufacturer acquisition. On 17 April, the group announced it has agreed to acquire Turkish sinter metal component manufacturer Tozmetal.

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.

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