All guns blazing at GKN

Potential hefty damages in the US should not hamper the defence and automotives group

When CK Chow joined GKN last July as chief executive designate, the omens were set fair for a relaxed start in the job. But as he took up the reins on New Year's Day, he already faced a tough problem which had sent the shares into freefall.

In December the automotive components to helicopters and waste services group declared it could face damages of up to half a billion dollars in the United States - destroying profits this year. A US jury had decided to award a penalty of pounds 91.6m against GKN in favour of some franchisees of its US subsidiary, Meineke Discount Muffler Shops, over some disputed rebates on press advertising.

GKN has chosen to appeal against the decision, but faces the risk of the penalty being tripled if it loses the appeal. The company is confident that not only will the damages be reduced, but that there is only a minuscule chance the sum can be increased. Most followers in the City take a similar view and longer term, there is little to suggest GKN's prospects have been damaged much, if at all.

Long-term shareholders have little to complain about, given the threefold rise in the share value over the last five years. Times may have changed from the days when, as Guest, Keen and Nettlefold, the business was one of the great British metal bashers, but GKN looks to be well up with the demands of the late twentieth century.

Ironically, defence, despite fears of shrinking budgets, has been one of the cornerstones of the company's recent success. In 1994 it made the bold decision to buy Westland, the ailing helicopter concern at the heart of a Tory defence scandal in the mid-1980s. From wafer thinness, Westland's order book currently stands at pounds 4bn - pounds 2.7bn of which is from a Ministry of Defence order for the new Apache attack helicopter - and profits are buoyant.

The picture at GKN's Warrior light armoured vehicle business - its only other defence operation - is less bright. However, the company, in partnership with Krauss Maffei of Germany, looks to be well placed in the bidding to build the European "battle taxi", the first major commission by the new pan-European defence procurement agency.

Either way, the vehicles division will have a key role in an expected wave of consolidation for companies in this market, including Vickers and Alvis in the UK, Giat of France and Krauss Maffei itself.

Mr Chow's challenge will be to ensure that, in the face of the more or less global phenomenon of ever dwindling defence budgets, GKN can continue to thrive in this field.

Elsewhere, GKN is firing ahead on all cylinders. In its automotive and agritechnical components business it retains clear ties to its roots as a heavy engineer. GKN automotive parts are used in almost every car manufacturers' models.

Automotive parts is a fast-moving world these days, with suppliers having to run just to keep up with their clients' demands: a trend ushered in by the revolutionary tactics of Ignacio Lopez - first at General Motors in Spain and subsequently at Volkswagen in Germany - who re-drew the way car makers buy from suppliers.

GKN, however, seems to have weathered the storm in good shape. It has capitalised on the upheavals with an equally radical response: outsourcing for the major car manufacturers. Its first deal of this kind was in 1994 with Fiat in Italy, when it bought Fiat's joint and driveshaft facilities in Florence. GKN built a new workshop and took on the existing workforce.

The company followed this up last year with a similar deal for Fiat in Poland, with the purchase of the manufacturer's local constant velocity driveshaft (CVD) factory. GKN is now looking to sell its CVDs to other Polish car makers.

GKN's other main division, industrial services, is split into two areas: waste management; and palettes and reusable packaging. Cleanaway, a joint venture with the Australian company Brambles Industries, runs the UK's largest commercial incinerator, at Ellesmere Port, in Cheshire, as well as handling waste disposal contracts for several local authorities. It also provides landfill services.

Having built its UK base, Cleanaway is now on the expan-sion trail and has bought a Dutch recycling business. Its most recent deal was the pounds 54.7m purchase in November of Mabeg, a German environmental firm.

Chep, the palette division, is a favourite in the City. The business now runs 57 million palettes in 16 countries, up from 44 million in 1994. As well as palettes, it is developing reusable plastic packaging for delivering components and parts to factories and suppliers.

Growth, says the company, is likely to be more of the same: decent organic progress in the core businesses, with bolt-on acquisitions where the opportunity exists. But the City would probably be favourable to a big acquisition if the price was right - and the most likely area would be in defence, either to firmly establish Westland as a global player, or ditto for the armoured vehicles division. That could see "CK", as he's known to staff, leave a lasting impression on the group and the Meineke damages would be but a distant blip in the past.

The shares will remain something of a gamble ahead of a final outcome to the local difficulty in the US, but on a long-term view, they remain a convincing buy.

GKN

Share price 990p

Prospective p/e 15*

Gross dividend yield 2.6%

Year to 31 Dec 1993 1994 1995 1996* 1997*

Turnover (pounds bn) 2.02 2.47 2.89 2.95 3.23

Pre-tax profits (pounds m) 97 200 322 368 410

Earnings p/s (p) 18.2 37.4 57.3 66.4 76.1

Dividend p/s (p) 20 21.5 24 26 28.5

*BZW forecasts, not adjusted for Meineke

Voices
On the last day of campaigning before the polling booths open, the SNP leader has written to voters in a final attempt to convince them to vote for independence
scotland decidesIs a huge gamble on oil keeping First Minister up at night?
Arts and Entertainment
Rosalind Buckland, the inspiration for Cider with Rosie died this week
booksBut what is it like to be the person who inspires a classic work of art?
Life and Style
techApple has just launched its latest mobile operating software – so what should you do first?
News
A male driver reverses his Vauxhall Astra from a tow truck
newsThe 'extremely dangerous' attempt to avoid being impounded has been heavily criticised
PROMOTED VIDEO
Arts and Entertainment
Lionel Messi in action for Barcelona
filmSo what makes the little man tick?
Arts and Entertainment
tvReview: An undercooked end (spoiler alert)
News
i100
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Pharrell dismissed the controversy surrounding
musicThe singer said 'the last thing I want to do is degrade'
Sport
Cesc Fabregas celebrates his first Chelsea goal
footballChelsea vs Schalke match report
Arts and Entertainment
Toby Jones (left) and Mackenzie Crook in BBC4’s new comedy The Detectorists
tvMackenzie Crook's 'Detectorists' makes the hobby look 'dysfunctional', they say
Life and Style
fashion

Olympic diver has made his modelling debut for Adidas

News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Recruitment Consultant - Soho - IT, Pharma, Public Sector

£20000 - £25000 per annum + OTE £35,000 first year: SThree: The SThree group i...

Sales Executive

£20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week