The market doesn’t like being kept in the dark so some of the weakness in automotive and aerospace engineer GKN’s (GKN) share price this morning can probably be attributed to the lack of clarity on two separate claims which will deliver a £40m hit to 2017 profit.

The shares are down 7.3% to 326.5p. The company says the two ‘probable claims’ relate to its aerospace and auto components businesses respectively but declined to elaborate citing commercial sensitivities.

Departing chief executive Nigel Stein has subsequently said the claims do not relate to litigation and are not expected to be recurring, claiming management were informed of both in a 24-hour period earlier this week.

Combined with a challenging period for its US aerospace arm, which faces productivity issues and pricing pressure, profit guidance for this year is being downgraded to ‘slightly above’ 2016’s £678m. Consensus had pencilled in profit of £735m, implying a downgrade of around 7%.

Stein steps down at the end of the year with the head of the aerospace division, Kevin Cummings, set to replace him. Finance director Adam Walker is set to leave in November.

A PROFIT GAP

AJ Bell investment director Russ Mould notes the gap between statutory profit and adjusted profit at GKN had been growing rapidly in recent years (see chart).

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‘While one interpretation of this profits gap at GKN would be that the company was simply being more transparent, giving shareholders greater clarity on how its actual operations were doing, another could be that management was having to work ever harder to reach analysts' and its own expectations, by taking an ever-greater number of charges and provisions which were then presented as "exceptional" to put a gloss on the stated figures,’ Mould says.

Given new management often take the opportunity to rebase expectations, it may be prudent to expect further volatility at GKN when Cummings takes over in 2018.


Issue Date: 13 Oct 2017