Bottom Line: Europe puts brake on GKN

SIR DAVID LEES, chairman of GKN, says it would be content to remain a minority shareholder in Westland for the next five years, as it has been for the past five, if its bid fails to win the day.

Whether shareholders will continue to take such a sanguine view of recovery prospects at GKN as a group is more arguable. At 536p, its shares are discounting a significant bounce-back in profits over the next couple of years.

The main prop against disappointment is a 4.8 per cent dividend yield, although earnings have not covered the payout for the past two years and may only just do so this year.

The severity of the downturn in mainland Europe, its largest single market, where car and truck production fell by 20 and 25 per cent respectively, is reflected in GKN's 1993 figures, with a 20 per cent fall in pre-tax profits to pounds 97.5m.

Despite a strong performance in the UK and progress in the US, a double-digit fall in GKN's mainland European volumes slashed second-half operating profits in automotive and engineered products from pounds 42m to pounds 28m as margins fell from 5.6 to 3.9 per cent.

A jump in restructuring costs from pounds 12.9m to pounds 20m will probably be reversed this year and enable automotive profits to show some improvement.

GKN, perhaps caught on the hop by the European slump last year, is nonetheless forecasting an optimistic-looking 4 per cent rise in European car production this year. But it is likely to continue to gain market share, as its Fiat outsourcing venture underlines, while the build-up of sales from its dollars 50m ( pounds 34.5m) Roxboro project will also be chipping in.

Its share of losses at UES, a chunky pounds 19m in 1993, ought to come down in 1994 unless another round of severe cost-cutting is needed. But GKN seems to be stuck with this headache.

Westland will enhance GKN's earnings, but even so pre-tax profits of pounds 135m this year imply a p/e ratio of 24, which may be hard to sustain if recovery disappoints.