US Edition GKN
185.9p -9.2p
Questor says BUY
Yesterday, GKN said that quarterly profits were up just 1pc after it took a charge for the closure of a US plant. However, the business looks like it is performing well – and it has a healthy order book.
New business is underpinned by a growing global auto market and should be boosted by later-cycle growth in aerospace.
The group owns Driveline, which makes vehicle parts such as drive shafts, axles, differentials and wheels. Despite troubles in the West, the worldwide auto market continues to boom, fuelled by Asian demand. Indeed, yesterday Matthias Mueller, chief executive of German sports car maker Porsche, said the company had a full order book and he saw no signs of a downturn in the industry. GKN is a supplier to Porsche.
The aerospace business makes items such as fan blades, fuselage components, cockpit windscreens and exhaust systems. GKN counts both Airbus and Boeing as its customers. The group is in a good position to benefit as a specialist in lighter, composite materials, which help cut fuel consumption in these environmentally conscious times.
The group also has a Land Systems operation, which supplies wheels and other parts for agricultural,
mining and construction businesses. This is an interesting area in which to operate, as agricultural demand is rising with population growth. Indeed, the United Nations reckons the world's population will cross the 7bn mark later this month. A little over a decade ago the global population stood at 6bn.
To bolster the unit, GKN bought German group Stromag for £174m including debt. Stromag sells clutches and brakes for agricultural equipment and wind turbines. This means the group has also moved into renewables, a business area that will be supported by tightening legislation in the coming years.
It also bought all-wheel-drive (AWD) components businesses of Getrag, a privately-held German company controlled by the Hagenmeyer family. This augments its Driveline business.
GKN also has a power metallurgy unit, which makes specialist products from powdered metals.
The business said that sales in the three months to September had risen 11pc to £1.48bn,
with pre-tax profits edging up to £89m from £88m after a one-off charge of 11m.
In automotive, Driveline's sales were up 10pc compared with last year, against 2pc growth in global automotive production. This implied a gain in market share and/or price increases. However, some analysts were concerned about margins at the unit, which came in a 6.7pc.
Sales at Power Metallurgy also rose 10pc. Sales at Land Systems were 9pc lower than the second quarter because of seasonality but were 23pc ahead of sales in the third quarter of last year. Aerospace sales grew by 3pc on a year-on-year basis.
Following the two purchases in the period, net debt came in at £696m, in line with expectations.
Overall, the statement is reassuring and should underpin analysts' forecasts.
The shares are trading on a December 2011 earnings multiple of 8.7 times, falling to 7.3 in 2012. This is far too low for a group expected to grow earnings by 20pc in 2012. The prospective yield, at 3.7pc rising to 4.6pc, is attractive.
The shares were tipped as a buy on July 19 this year and they are down 18pc compared with a FTSE down 7pc. The shares remain a buy for the strong medium-term outlook.