The Investment Column: GKN growth to slow down

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GKN SHAREHOLDERS have watched the engineering company's shares recover from 535p in October to a recent high of 1136p, after they took a pummelling when the market became gripped by fears of global recession.

GKN's management, by communicating clearly with the City and winning helicopter orders, can take the credit for the recovery. The anticipation of good news with yesterday's interims - operating profits rose 8 per cent year-on-year - has helped too. Whether the next six months will see the same acceleration in the shares is another matter.

Of the company's three divisions - aerospace, industrial services and automotive systems - the most exciting is the hardest to value. The services side, dominated by CHEP, which handles the distribution of groceries from supplier to supermarket, has few comparable businesses.

It has a deal with Wal-Mart and grew sales by 40 per cent in the first half of 1999. That cannot be sustained, GKN says, and growth of 20 per cent is more likely going forward.

Easier to value is the autos side, which makes the systems transmitting engine power to wheels. First half results suffered as the most successful European car producers in the period do not tend to be those who outsource to GKN. The second half should improve when new Fiat and Rover production kicks in.

The aerospace business, by contrast, has highly visible earnings growth. Deliveries will rise from 26 this year to 40 and 50 the following years andGKN is bidding for around pounds 2bn of business.

DKB expects pre-tax profits of pounds 518m and earnings of 51p per share this year, rising to pounds 580m and 56.9p in 2001. This puts the shares on a forward p/e of 22, pretty fancy for an engineer. Whilst the possibilities for CHEP are good, there is a risk that the auto business could suffer from an industry recession. The shares are fully valued.