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GKN – Onwards and Upwards to Even Greater Success By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

 

gkn28 Jul 15. With company guidance pointing to yet another year of sound growth GKN has told investors today with its interim results that the bulk of divisional activities produced solid performance during the first half of the year. The take from the announcement today that includes a very interesting acquisition is that despite small areas of weakness in some poor performing global economies, these are an excellent set of results that point the way to further great success for GKN in the years to come.

Of particular note within these results is that during the first half of the year group trading margins hit 9% and also, that at the divisional level and despite continued weakness in Land Systems, that Driveline, Aerospace and Powder Metallurgy operations are all continuing to do very well and that the Group is very well positioned in all the markets is serves.

GKN is a global engineering business employing approximately 50,000 people in over 30 countries across the world. GKN Aerospace is a world leading tier one supplier of airframe and engine structures, components, assemblies and transparencies to a wide range of aircraft and engine prime contractors and other tier one suppliers. The division operates in three main areas, aerostructures, engine components, sub-systems and special products. GKN Driveline is a world leading supplier of automotive driveline systems and solutions serving most leading vehicle manufacturers. The division specialises in developing, manufacturing and supplying and extensive range of driveline products and systems. GKN Powder Metallurgy comprises Hoeganaes and GKN Sintered Components. The former is one of the world largest metal powder manufacturers that the latter plus others use to manufacture precision automotive components as well as those for other industrial and consumer applications. Finally, GKN Land Systems is a leading global supplier of engineered power management products, systems and services. The division is responsible for the design and manufacture and supply of products and services for the agricultural, construction, mining and utility vehicle markets and other key industrial segments.

While the GKN Land Systems division suffered an 8% drop in organic revenue, due to continuing depressed market conditions for specialist products such as these, further efficiency gains have been extracted in readiness for market improvements when these occur. A £5m restructuring charge was also reported in the results for this division and while there is as yet no sign of upturn few will doubt that at some point the market will turn in the right direction.

GKN Driveline performance has remained excellent and strong performance continues in the majority of markets. Increased content per vehicle is also a feature noted in these results. While it is true that not all markets are performing as well as the company would like, Brazil for instance continues to be impacted by economic downturn and that there has been a decline in the rate of overall growth in China, as far as GKN is concerned China is still performing and growing well.

Across the rest of the world India, North America and European markets have all enjoyed increased vehicle production although production in Japan continues to be weak. For the record, total world car and light vehicle production during the first half of the year was, according to IHS Automotive, 44.8 million units compared to 44.4 million in the equivalent period the year before. This growth level appears to me to be consistent with GKN’s own involvement in the sector.

GKN Aerospace continues to go from strength to strength although a decline in military activity due to reduced spending by many countries on defence reduced the overall benefit. Nevertheless, Commercial aerospace activities produced organic sales growth of 2%. Sheets Metal Inc., a technology leader in the manufacture of aircraft engine inlet lip skins and that has legacy positions on various Boeing aircraft programs was acquired during the year. New work packages awarded to the division are thought by GKN to be likely to provide $2.3bn revenue through their respective contract lives.

First half performance at GKN Powder Metallurgy confirmed that trading margins had increased to 11.8% and that £90 million of annualised new business had been won. Of note here also was that a joint venture in China had been agreed subject to approvals.

In terms of financials, the balance sheet remains strong. A small acquisition related increase in net debt to £708 million was noted but even allowing for the acquisition of Fokker Technologies which is discussed below and that will, along with a small placing of shares be part funded by debt there remains plenty of scope for further acquisitions if required.

Net assets of £1.58 billion at the period end (June 30th) reflected an increase of £79 million from the end of last year. Free Cash Flow came in at £21 million, a £2 million improvement over that reported for the period a year earlier, and there was a significant £178 million improvement in the overall pension deficit. GKN has thus ended the period in a very strong financial position with ample scope to further both organic and acquisition strategy. The outlook remains good and I anticipate further success in the majority of markets that the company serves.

Fokker Technologies Group

As previously mentioned, in addition to announcing half-year results this morning GKN confirmed the acquisition of Fokker Technologies Group, an organisation that has an enterprise value of EUR706 million (£499m). Consideration payable will be EUR 500 million (£353 million) and this will be part funded by a proposed £200 million placing of new shares and the remainder by increased borrowings. The acquisition moves GKN into the second largest aerostructures manufacturer worldwide and third placed in electrical wiring systems.

At the end of 2014 Fokker Technologies had net assets of EUR 814 million. Adding, as it does, a tier one supplier of aerostructures, electrical wiring systems, landing gear and associated services across commercial, military and business jet end markets this is in my view an excellent and substantial addition to the GKN Aerospace portfolio of activities and one that will provide substantial benefit in the years to come.

Headquartered in the Netherlands and, until 1996, part of the now defunct Fokker Aircraft Company I take the view that from a strategic and business point of view the acquisition of Fokker Technologies is one of the most interesting and important to have been made by GKN in recent years.

From quick research I see that Fokker Technologies develops and produces over 7,000 different advanced components and systems for the global aerospace industry and has R&D and production facilities not only in the Netherlands but also in Turkey, the Americas and China.

Reported revenues for FY14 were EUR758m and EBIT (earnings before interest and taxation) EUR 53 million. With operational cash flow of EUR 45 million and an EBIT margin of 9.9% the forward order book was stated at EUR7 billion.

The position that Fokker Technologies has on two very important programmes, the Airbus A350 for which the company produces the Outboard flaps and the Lockheed Martin F-35 Joint Strike Fighter for which the company produces Flaperons and Outboard Leading Edge Flaps, in-flight opening doors, fairings, drag chute fairing assembly, electrical wiring harnesses and cable are particularly interesting. Amongst others Fokker Aerostructures are engaged on the following aircraft and helicopter programmes: Airbus A330, A380, Boeing 747-8 and AH-64 Apache, CH-47 Chinook, Rolls-Royce Trent 500/1000/XWB engines, Gulfstream G650, AgustaWestland AW169, NH Industries NH90, Bombardier, Cessna and various others.

Having known and followed this company for well over forty years and having nothing but admiration for GKN’s four-pronged strategy of leading in chosen markets; of leveraging strong global presence; of differentiating through technology and achievement and of driving operational excellence in order to sustain above market growth I am left in little doubt that not only has this strategy served the company well but that it will continue to so do. With the many excellent positions established, particularly in aerospace, automotive and powder metallurgy across both mature and growth markets I believe that GKN is well positioned to move from strength to strength.

With a long history of adapting to change in market conditions and requirements, of investing in itself, of recognising that it is only by having technology that others do not have that wins business and market success and that only by striving to be even more efficient at what it does provides the competitive edge can all be considered as commendations of the strategy that GKN management have adopted. This is also in my view a strategy that will lead the way to even stronger financial performance in the years ahead, to better shareholder returns and dividend payments. Last but by no means least I would say that it is only by being prepared to invest in research and technology, something that GKN does well on the back of a 3% to 4% target of sales, together with investing in the business itself and in its people that is the best way of pointing to longer term success. Onwards and upwards then for GKN – a future on which an excellent strategy is based not only on short-term but long term thinking as well.

CHW (London 28th July 2015)

Howard Wheeldon FRAeS

hwheeldon@wheeldonstrategic.com

Tel: 07710 779785

 

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