Cash-pile boosts GKN's fortunes

The Investment Column
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The Independent Online
Sir David Lees, urbane chairman of GKN, exudes a sense of self- assured reliability that is mirrored by what we've come to expect from the company's results. The former metal-basher has transformed itself with great aplomb into a diversified, international, motor components, industrial services, and defence group.

Yesterday's 11 per cent rise in half-year pre-tax profits, to pounds 181m, was at the top end of City forecasts. A closer look at the sales figures underlines the way the make-up of GKN is changing. In the first half of the year automotive products accounted for 63 per cent of turnover, down from 69 per cent in the first six months of 1995. The change is more pronounced in terms of profits, with the share for the vehicles side of the business dropping from 68 per cent to 57 per cent.

Both the Chep pallet hire operation and Westland, which GKN bought in a hostile takeover battle two years ago, are proving their worth as a counterbalance to the still-subdued automotive components trade. Pallet hire and waste management may sound mundane, but with industrial services profits jumping by 42 per cent, to pounds 37m in the first half, it hardly matters.

Even better was the performance at Westland and the armoured vehicles division, where earnings soared by two-thirds, to pounds 38m. Westland's order book is stronger than ever, with the signing in March of a contract to supply the Apache helicopters to the British Army, and should stand GKN in good stead, into the next century.

Even vehicle components managed to hold their own, with profits falling by a marginal pounds 1m, and although the tough conditions in continental Euro- pean markets look set to continue, in the US and UK things are starting to pick up. All this has given GKN a pounds 250m cash-pile - after stripping away the boost from advance payments for defence orders yet to be delivered - and a further shopping trip for acquisitions is well underway, though in classically conservative GKN-fashion.

Investors who pitched in to the shares a year ago, at around 780p, have enjoyed in the past 12 months a storming run with a 32 per cent rise, to yesterday's close of 1025p, easily outstripping the market's relatively pedestrian 10 per cent increase.

From next year Sir David will split the top job, giving "absolutely full responsibility" to a new chief executive, CK Chow. There have been some questions raised about the extent to which Sir David will continue to pull the strings at the firm, but they seem unnecessarily alarmist.

With analysts forecasting profits for the full year of at least pounds 360m, the shares currently trade on a prospective price/earnings ratio of 16. Compared with a growth rate that has slowed markedly since 1994 and 1995, that is a full rating; the shares are high enough.

Bid possibilities offer TDG hope

So many companies piled into distribution in the 1980s that the sector is now looking horribly crowded and the pain is starting to show. Christian Salvesen has found the going tough, hence the pounds 1bn takeover attempt by Hays. Tibbett & Britten and NFC have had their problems. And Transport Development Group has been a long-term struggler. Its figures yesterday made grim reading, though there are hints that the worst may be over.

One glimmer of hope for TDG's long suffering shareholders is the possibility of takeover action. With margins hit by increasingly powerful customers such as the supermarket groups, size and volume is becoming more important. The Hays-Salvesen bid is symptomatic of an industry rapidly heading towards consolidation and a gap is already opening up between the division one players and the also rans.

TDG hopes to play its part in that consolidation as a predator though it could easily end up as prey. Even if a bid fails to materialise there are some signs of trading improvement.

Profits in the six months to June were down almost 10 per cent to pounds 15.7m with the consumer division, which services the retailers and food manufacturers, causing the most concern. Profits dipped sharply due to the loss of a confectionery contract which is being replaced with lower margin business.

There was better news elsewhere. The hire division was flat, hit by increased competition and lower margins particularly in the plant hire market. However, in an industry that has seen profit warnings from both Hewden-Stuart and Vibroplant, a flat performance is creditable.

The industrial division increased profits and has won new business. With its customers not yet as canny as the supermarkets in their logistics negotiations, margins are fatter here and improving.

TDG's shareholders have had a pretty rough ride in the last two years, with the shares sliding from a high of 326p in early 1994 to 205p yesterday, down 0.5p. Though management have done well to cut costs and sell off parts of what was a sprawling business, the City is waiting for signs of growth in the sales line. Full-year profits of pounds 34.5m are forecast which puts the shares on a forward rating of 13. Worth holding.

It's still do or dye at Holliday

Holliday Chemical has been an unmitigated disaster since it came to the stock market at the beginning of 1993. A profits warning within eight months of flotation set the tone. Since then there has been another warning, the loss of the group's chief executive after only 18 months in the job, the departure of the finance director and a slump in the share price to a low of 103.5p in January.

Little wonder then that half-time figures showing a recovery from last year's calamitous second half should have put 6p on the share price to yesterday's close of 136p. After the catalogue of woes that Holliday shareholders have had to endure, even a slump in interim profits from pounds 11m to pounds 8.1m seemed harmless enough compared with the pounds 1.1m earned in the final six months of 1995.

If Michael Peagram, Holliday's chairman, has learnt anything from the past few years it is not to disappoint the City which takes no hostages when its expectations are dashed. So his relatively downbeat statement, citing tentative business confidence and a continuing focus on Holliday's own performance, should be seen as an overly conservative assessment.

But the dyestuffs market remains tough with several large European players prepared to trade at a loss to grab market share. The inks market is also struggling thanks mainly to depressed conditions in France.

Even so, analysts were yesterday pushing up their forecasts to about pounds 16.5m, ahead of the pounds 15.4m achieved in 1995 but well short of the pounds 19.3m reported in 1994. That figure is expected to be exceeded next year when profits could reach pounds 20m.

If the 1997 target is reached, the shares will trade on a prospective p/e ratio of 10. Not a demanding rating, but it would be wrong to expect much more given the bridge-building with investors still required. A dividend yield of 4.9 per cent provides some support.