GKN still divides opinion in the City

British aerospace and automotive engineer GKN treated analysts to an informal dinner last night to discuss its core Driveline division, and the move to hybrids and electric vehicles. Most left impressed, some even upgraded profit forecasts, but others remained sceptical and see no catalyst for shares to outperform.

Driveline, which supplies driveshafts, differential gear systems and axle couplings to major car and truck manufacturers, is GKN's largest division both in terms of revenue and profit.

The top line grew by 10% in the six months ended June to £2 billion, half of which was organic growth. Trading profit was up 9% (3% organic) to £164 million, just ahead of the higher margin aerospace business.

David Larkam, an analyst at Numis Securities, argues that GKN's consistent positive organic growth in recent years is still not reflected in GKN's rating.

Shifting focus from growth to efficiency, margin and cash flow should have a "far greater impact on earnings which in turn should help reduce the rating disparity albeit concerns over the cycle peaking in auto will remain," he writes.

"We have marginally upped 2017 and 2018 forecasts and see a rating of 13x as hardly demanding, giving a 390p 12 month price target. Also note the expectation of TI Automotive listing on the UK market in Q4 2016 which would provide a further comparator."

Larkam now expects earnings per share of 29.6p in 2017, up from an estimated 25.9p this year. It should rise a further 9% in 2018 to 32.3p. There's also a great chance of a big foreign exchange benefit.

But fellow diner, Panmure Gordon's Sanjay Jha, left the shindig underwhelmed, and made some interesting observations about management's attitude to electric vehicles.

"Last night, I witnessed the first signs of excitement from the company on electrification of cars even though most of the energy was coming from the Michigan-based SVP of Engineering & Technology (Dr. Ray Kuczera)," wrote Jha the morning after.

"If GKN was a US company it would have finished the analyst presentation with a table-thumping slogan, instead it ended with "electrification is good for GKN Driveline".

"In the short term, we see no reason to change our estimates," he added, keeping forecasts for EPS this year at 29.4p, rising to 30.5p next year and 31.9p in 2018.

"GKN will continue to outperform the underlying market reflecting the shift towards [All-Wheel Drive] and [Sport Utility Vehicles]. Long-term, the big unknown is how electrification and emerging sharing business models will change the overall volume of cars sold annually.

"We see no catalyst for shares to outperform given the pension deficit of £2.1 billion and no change to lunatics (otherwise known as central bankers) intent on destroying market economies and pension funds."

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