With Volvo Aerospace and, more recently, the venerable Fokker business in the Netherlands under its belt, GKN has shown the ability to carry out value-enhancing acquisitions even if this year is a bit of a trough for that side of the business. One analyst was setting an old hare racing yesterday — the demerger of the automotive and aerospace sides.
This looks implausible as, while aerospace has been relatively quiet of late, automotive has been moving ahead so the two should balance each other, and the position should reverse in the coming months as programmes such as the Airbus A320neo kick in. At present the drag is the military side, as orders for the Black Hawk attack helicopter, the
C-17 transport craft and the F-15 and F-18 fighter jets dry up and GKN waits for the benefits of the F-35 programme to come in. So military aerospace orders were down by 14 per cent in the first half, while commercial were 8 per cent ahead.
Fokker, which folds into aerospace, unusually for a private equity-run business produces relatively low margins in the 7 per cent region as against 10 per cent to 12 per cent in the group, and the company has already warned that this will be a drag in the near term.
Elsewhere in the group, sales for Driveline, which supplies the automotive industry, were up by 5 per cent, well ahead of a world market that probably grew by 2 per cent as the division gained business from manufacturers such as Daimler and Volvo. Margins in powder metallurgy are ahead of the targeted range at above 12 per cent and Land Systems remains depressed by a lack of demand in North American agriculture, a long-running hindrance and probably not about to get much better for now.
GKN has instituted another £30 million of savings for 2017. Debt remains below £1 billion but the main problem is the growing pension deficit, up £500 million to £2.1 billion owing to the falling value of bonds and exchange rates translation. This will erode over time if inflation picks up, but that is little comfort to investors today. GKN shares have been flat over the past year and, up 11p at 301p, sell on little more than ten times earnings, but it is not clear what short-term catalysts may spark an improvement.
My advice Hold
Why The company is gaining new business and market share and the acquisitions are performing well, but shares look up with events
Tyman
Tyman operates in a limited area — products such as doors and windows for the building trade — but it has an enviable record of finding acquisitions; a handful over the past couple of years after a big one, Truth Hardware in the US, in the summer of 2013. The latest, Bilco, takes its proportion of sales from North America to 65 per cent again, after the earlier purchase of Giesse, an Italian maker of aluminium hardware. It even bought into Brazil in a limited way.
The interim figures contain few surprises even if the US market was the stand-out with reported revenues ahead by 11.5 per cent. The UK is expected to be subdued in the second half, and I do not detect another big deal on the horizon. The nature of its business means each transaction brings cost savings of a few million pounds, which adds to margins. Borrowings are under control; the last deal was funded by a small placing at well below the current share price, up 10p at 289p.
Tyman has quietly grown its market worth to about half a billion pounds. The shares change hands on about 14 times earnings, which looks like a good play on the company’s ability to do further deals.
My advice Buy
Why Tyman is well placed for further expansion
Unite Group
The number of students at UK universities is rising faster than the number of beds being built to accommodate them, and even a UK exit from the European Union is unlikely to change this. The student property sector, therefore, looks well insulated from any troubles looming elsewhere. Most projections have student numbers growing by 90,000 to 100,000 over the next three years, with beds increasing by 75,000.
Even before the EU referendum several big overseas investors chose to invest in the sector, which has helped to swell the value of the portfolio held by Unite Group, one of the biggest players. This and rising rents sent the net asset value per share of its portfolio ahead by 7 per cent to 620p in the first half of the year. The only drag on performance is identifying sites to build on.
Unite has just short of 50,000 beds and another 9,000 being built, including 2,100 just added to the pipeline in the university cities of Birmingham, Liverpool and Portsmouth. The company reckons that stream of new properties will allow it to increase earnings per share from a projected 26p or so this year to 39p-44p by 2019. Unite will become a real estate investment trust next year, a reflection of the increasing maturity of the market, which will bring tax advantages to investors and lead to higher dividends.
The attraction of such shares should be the reliable dividend yield. The shares, up 2p at 635p, yield 2.6 per cent, which is hardly stellar, but I would be inclined to hold them on a long-term view.
My advice Hold
Why Dividends should rise as reit status is achieved
And finally ...
In a very busy trading day it would be a shame to miss the trading update for the first quarter from Acal, a maker of bespoke electronic components. Orders in July are ahead of last year and the company is cracking down on costs by transferring production out of three Nordic facilities into lower-cost ones elsewhere. More to the point, with four fifths of revenues derived from outside the UK, it will do well out of sterling’s depreciation against the euro — that eurozone exposure has been a headwind in the past.
