GKN should merge or set up joint ventures for its helicopter and aerospace interests, sell Meineke in the US and shed its non-core activities such as wheel manufacture, cab assembly and its Sankey telephone kiosks business.
So says analyst John Buckland of Daiwa Institute of Research Europe, who in a strategic analysis note on the group also spotlights the major growth prospects of its powder metallurgy and Chep pallets interests as well as its emerging agritechnical products. He takes a `positive’ view of the group overall.
The analyst expects the constant velocity joints business to grow only slowly as the market matures and urges the company to develop components for alternative power such as electric motors, small gas turbines, and fuel cells.
The broker notes that the shares have lost their premium rating under the shadow of the Meineke case -the US exhaust supplier involved in litigation – strong pound, price/margin pressures in the sector and exposure to the automotive industry where there is over-capacity.
Buckland regards the shares as under-valued and rates them a buy. He believes strategic moves in line with his analysis would `add to GKN’s long-term attractiveness’.
He forecasts group operating profits up 9% at £385.7m on sales up 5.25% at £3.51bn. Next year he is looking for sales to fall 2.2% to £3.43bn with profits only marginally up at £387.1m.
He expects the strongest area of growth to be the industrial services division where Chep provides 85% of sales and most of the profits.
The analyst sees organic growth prospects in helicopters as `limited’ and thinks a major or strategic alliance should be set up while GKN Westland has a healthy order book. Aerospace interests should join forces with `other firms in a similar predicament’.
Buckland believes GKN could get good prices and replenish its cash resources with the disposal of the wheel, cabs and phone kiosks businesses.
Its recent acquisition of Sinter Metals established GKN as world leader on powder metallurgy, an industry set to grow enormously, and one that `significantly boosts the group’s growth prospects.’
C K Chow, GKN’s new chief executive, is working on a strategic review due for publication this summer.