GKN shares exceed expectations

Investors collect their profits as interims excel and broker upgrades full-year earnings forecasts

Investors have flocked into GKN, inspired by a strong recommendation from investment bank Lehman Brothers. The bank says the automotive to aerospace and powder metallurgy giant can sustain ‘above-market earnings growth at least until the end of the century’.

Substantial upgrading of forecasts on the stock following the recent interims by Lehman analyst Charles Armitage has seen the price at a 12-month, 1,286p high. Though the ups of the now see-sawing pound and the nervous Stock Market has tempered the gain, his message that this is a quality stock has struck home.

Lehman’s upgrades follow interim profits some £15m above market expectations at £203m, and 12% up on the same period last year. And that despite a currency hit of £18m, £8m more than the company had indicated at its annual general meeting.

For the full year, Armitage has upgraded by £24m to £402m pre-tax (£92m last year after £270m exceptionals), increased his estimates of earnings by nearly 8p a share to 87p, and lifted his dividend forecast by 2.5p to 29.5p (26.5p last year).

For 1998 he has upgraded pre-tax by £7m to £436m and the dividend by 1p to 32p.

Armitage says the surprise of the interims was the healthy margin of three divisions – automotive, aerospace and special vehicles.

In a generally dull market, automotive margins were up nearly 1% at 9.7%, and may improve still further, the analyst believes.

Other bull points he spotlights are that half of the profits are coming from businesses growing at more than 15% annually, the improved quality of earnings in the Westland order book, the 20% sales growth of industrial services, and the ‘inexorable rise’ of the Chep pallet business.

Earlier this year GKN’s shares were only 920p. But even ahead of the interims, brokers believed them undervalued. Broker Albert E Sharp recommended them in mid-July at just over £10. Clients who bought then saw a near £3 profit last week.