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GKN shares plunge on profit warning prompted by legal claims and US aerospace difficulties

GKN expects a one-off charge of £40mln resulting from two “significant external claims” related to its GKN Aerospace business and GKN Driveline division.
The US aerospace division saw a 'significant reduction' in profit margins in the third quarter

British aerospace and automotive engineer GKN PLC (LON:GKN) has warned its full year profits will be just “slightly” higher than in the previous year after “disappointing” trading at its US aerospace arm and costs resulting from two legal claims.

Shares plunged 9.87% to 317.80p in afternoon trading following the shock announcement. 

The company expects a one-off charge of £40mln from two “significant external claims” related to its GKN Aerospace business and GKN Driveline division.

READ: GKN in strong position with electric vehicle innovations but challenges lie ahead, analysts say

GKN brought forward its trading update for the third quarter after being made aware of the two “probable claims”.

“Both claims are commercially sensitive with no additional information disclosable at this time,” the group said.

GKN also reported a “significant” reduction in profit margins at its aerospace business due to ongoing pricing pressures, continuing operational challenges and the impact of programme transitions.

The group said these headwinds are expected to continue through the fourth quarter, though it should benefit from a positive one-off retrospective pricing adjustment of £20mln.

A £15mln writedown was announced at its facility in Alabama and the company expects a “significant non cash-impairment charge” related to the US business.

Automotive division to outperform market

In its automotive division, third quarter sales were well ahead of global industry production rates, which rose 2%.

GKN noted external forecasts for a 2% rise in full year global auto production as growth in Europe offsets declines in North America and China.

The business is projected to “significantly outperform” the market for the full year.

READ: GKN boosts investment in electric vehicle technology as it reports rise in first half profits

The trading margin for 2017 is expected to be broadly in line with the previous year, reflecting additional costs of raw materials and investments in eDrive.

Despite a decline in US automotive production rates, the GKN Powder Metallurgy business continued to achieve organic sales growth in the third quarter, boosted by favourable foreign exchange rates, acquisitions in China and in Turkey. Margins reduced slightly, however, due to higher raw material prices.

GKN takes action to improve operational performance and margins

"GKN continues to grow well against its end markets although recent margin performance has not met our expectations,” said chief executive Nigel Stein.

“In addition, it is disappointing that we expect to have to provide for two unexpected claims which will slow our steady growth in profits.”

Stein said the company is “redoubling our efforts to improve our operational performance” at the US aerospace business as it taking action to improve margins across the group. 

Hit to shares but not long-term prospects, says Hargreaves 

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said while the profit warning will dent the share price, it shouldn't drag on the group's long-term prospects. 

"Nonetheless, these claims seem to have appeared out of the blue, which rather leaves us wondering whether there are more nasties hiding under the bonnet.
Mysterious external claims aside, underlying performance looks mixed, but reasonable"

"The Driveline business continues to perform, with Powder Metallurgy putting in a respectable turn as well. Margin problems in aerospace are unwelcome, but what looks like good growth in military is a welcome bonus.”

Liberum said the announcement of the £40mln charge equates to a 5% downgrade to its full year pre-tax profit forecasts if taken above the line.

The broker added that it has been concerned about the difficulties in the US aerospace business since January as it repeated a 'sell' rating and target price of 300p. 


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