GKN profits up but talks on helicopter link drag on

THE LONG-AWAITED restructuring of the European defence industry will have to wait a little longer.

The defence group GKN is still in talks with Agusta Helicopters of Italy to create the second-largest helicopter group in the world. Chief executive CK Chow is confident that there will be an agreement by the beginning of next year. "We have not negotiated the alliance yet, but we have strong common agreement on a number of issues," he said.

When the deal is done GKN, which has recently signed a deal with its partners ARGE of Germany and Giat Industries of France to make battlefield "taxis" for European armies, will become a significant player in Europe.

"It is inevitable that the defence industry will be radically changedover the next few years. And we will be in a very powerful position to take an active role in the industry," said Mr Chow, who was speaking yesterday as GKN pleased the City with a sparkling set of interim results.

The slowdown and the strong pound, which has so ravaged the manufacturing sector, have had a minimal impact on GKN.

Mr Chow is keen to point out that GKN is a global engineering group and is not as exposed as many UK engineering companies, which are at the mercy of the strong pound.

Even the Asian crisis has not made a dent on the group's profits. Its exposure to the Asian market is small, and it is taking advantage of the turmoil to strengthen its presence there - GKN has now bought 100 per cent of its Automotive Driveline businesses in Korea and Thailand.

The helicopter-to-tanks group, which also earns significant money in waste management, announced a 13 per cent rise in profits to pounds 230m in the six months to 30 June. Shares fell by just 23p to 748p on a day of sharp falls in the market overall.

GKN's balance sheet is strong, with cash reserves of pounds 261m. The company is capable of launching a pounds 1bn bid, but there will not be one on that scale this year: growth is more likely to be organic, with takeovers in the region of pounds 50m to pounds 100m, said Mr Chow.

Despite the problems at Rover and a two-month strike at General Motors, the company's largest customer in the US, the automotive and agritechnical division was the star performer. The GM strike is likely to have cost GKN around pounds 600,000 in sales, but a good performance in Mexico will more than compensate.

Profits jumped by pounds 27m to pounds 133m on sales up 11.5 per cent to pounds 1.1bn. Sales and profits fell in the Aerospace and Special Vehicles division, but this was due to the completion last year of a contract for Desert Warrior armoured vehicles for Kuwait.

In the long term, the winning of the MRAV (multi-role armoured vehicle) contract for the British, German and French governments is far more significant. So far 600 orders for these "battlefield taxis" have been received, but GKN believes there is a market for 7,000 vehicles.

The group's other strong performer was its industrial services division, which saw sales up 22.6 per cent to pounds 255m.