Bottom Line: GKN has a sound base to build upon

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AS A 35 per cent share price outperformance this year might tend to suggest, 1994 looks like turning out to be a year to remember at GKN.

Having spent up to pounds 60m on redundancies throughout the group since 1990, GKN began to enjoy an upturn in volume in the second quarter, a combination that is propelling profits significantly higher.

The pounds 438m Westland acquisition, completed in April, is adding a tasty layer of icing to the cake. Thanks to the unexpectedly rapid pounds 190m settlement of Westland's litigation with the AOI, Westland is already enhancing GKN's earnings despite a poor time in its aerospace activities and delivery of just two helicopters.

By the end of June, GKN had net cash of pounds 76m under its belt. All that is needed to complete the glowing picture is some prospect of resumed dividend growth after three years of scantily covered payments. With GKN likely to come within hailing distance of twice cover by the end of the year, that cannot be too far away.

It is not just the windfall AOI payment that has come through quicker than expected. Western European car production is bouncing back faster than expected, as evidenced by a 60 per cent jump in Continental operating profits to pounds 43m and margins of 10 per cent, accounting for 70 per cent of the improvement in group operating profits.

A 29 per cent increase in automotive and engineering profits on the back of a mere 2 per cent sales increase, although depressed by a worse defence equipment out- turn, underlines the strength of the margin improvement despite persistent pricing pressures.

Industrial services, helped by loss elimination at Kwikform scaffolding, lifted profits by 25 per cent. Among associates, Chep pallets advanced again and is now breaking even in the US.

A strong share price this year means that GKN is on a prospective p/e of 18.5 even after upgraded profits forecasts to well over pounds 200m. But a yield of 4 per cent is still a good base on which to build and prospects look excellent.