GKN could still engineer a take off

Senior is tempting - but for the long term; Wembley too much of a risk
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Moustaches are suddenly the height of chic, we are told. Kevin Smith, the newly installed chief executive of the engineering conglomerate GKN, may find his top lip back in fashion, and on the evidence of yesterday's share price jump, the same might be said of the company's shares.

But a bit of scepticism on both scores is in order. GKN's products mix ranges from engine parts for the major car companies and the aerospace industry, through to building helicopters at its AugustaWestland subsidiary. Virtually all its markets are under pressure.

The automotive market - its largest, roughly two-thirds of profits - has suffered as car production fell 4 per cent in the US and 2 per cent in Western Europe. Aerospace is mixed. The civil aircraft market has suffered another setback with the Sars virus hitting the finances of Asian airlines. The military market is holding up.

Yesterday's interims covered the first period of Mr Smith's reign and showed him making the best of the testing situation. A 41 per cent jump in pre-tax profits to £113m, before accounting for exceptional items, and a 4 per cent rise in sales to £2.3bn, were ahead of analysts' expectations, hence the shares jumped 7 per cent.

GKN is bidding for a massive $7bn of helicopter business in the US with its partners Bell and Lockheed Martin which, if it won the lot, would see it build 360 aircraft. US defence spending is sharply rising.

Thankfully, there were no surprises on the pension fund deficit, which stood at £622m under the incoming FRS17 rule. The recent stock market rally has helped no end. But GKN is having to spend £40m of its cash a year to plug that gap, lopping £34m off bottom line profit.

The mixed picture in the aerospace market is likely to continue, while the automotive market will probably get worse before getting better in the fourth quarter. Beyond that, it might be too hopeful to imagine new car sales can continue at their current high rates.

GKN shares are on a forward earnings multiple of about 11 times. Hold in the expectation of positive news from the US helicopter market.

Senior is tempting - but for the long term

With a similar mix of businesses as GKN, albeit a fraction of the size, Senior is an engineer worth keeping an eye on.

The company makes flexible metal and other components for the aerospace and automotive markets, things such as exhaust connectors and engine gas tubes. Right now, it is making less of everything, since its car manufacturer customers ordered 5 per cent fewer components in the first half of this year, and the number of civil aircraft built since the 11 September attacks has fallen sharply.

Profit before tax fell £2m to £3.7m, on sales down 9 per cent to £186.9m. Senior is trying to dispose of much of its remaining industrial divisions, arguing that aerospace and automotive markets have higher margins and stronger long-term prospects.

After a cost-cutting drive that has halved debt in three years, Senior is in better shape than it was, but short-term prospects are as challenging as ever. Indeed, the cash inflows that were a highlight of the first half may not improve further for a while. Car production could be cut further if consumer confidence wanes or if interest rates look like they will tick up.

Senior shares, down 0.25p to 34.25p are not expensive on 10 times earnings, and the 6 per cent dividend yield is tempting, but this is a share to hold rather than to buy.

Wembley too much of a risk

Wealth warning: "Wembley continues to cooperate with a Federal Grand Jury investigation in the US into an allegation that potentially illegal payments were proposed in relation to the Lincoln Park business in Rhode Island. This allegation implies potentially serious offences were contemplated. There remains a significant possibility of claims or charges being brought, which could have material consequences for the group."

Forgive the fag-packet-sized warning, but it is important to stress that Wembley is a gambler's stock in more ways than one. The group, which owns dog tracks in the UK and the Lincoln Park casinos business in the US, could face humungous fines if the bribery allegations (which it strenuously denies) are proven true. The group had to pay £600,000 in legal fees in the first half of the year. Recent speculation of a management buy-out seems wide of the mark when such legal risks prevail.

All of which is a shame, because there was a pretty good short- and long-term growth story in Wembley, which once owned the UK's national stadium but now concentrates on "track-based gaming". With the liberalisation of the UK's gambling laws coming soon, the prizes are likely to go to operators with experience of running venues where slot machines, casinos and other betting opportunities are available alongside each other.

The shares have had a good run since their crash when the "wealth warning" was first made in March, largely because it is installing lucrative new video slot machines in Rhode Island. Pre-tax profits were up 125 per cent in the six months to June.

The outlook for the second half is not quite so rosy. The cash-strapped authorities in Rhode Island creamed off a greater share of gambling profits than expected, and a long-term profit share agreement is yet to be signed. Sell.

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