Why this FTSE 100 takeover target has a very bright future

GKN (LSE: GKN) has found it difficult to keep itself out of the headlines in recent months.

Last time I wrote about the FTSE 100 engineer was in the wake of a shock profit warning in October, the business reeling from two legal claims as well as difficult conditions over at GKN Aerospace in North America that it said would see full-year profit before tax come in “slightly” ahead of 2016’s levels.

A share price pasting followed the release, as one would expect, but further pain was in store just a month later after it advised the £15m non-cash charge incurred at its Alabama site in the US would, after the launch of a review of working capital across its aerospace operations across the Pond, be followed by an additional write-off of between £80m and £130m.

The distress for shareholders was compounded by bloodshed in the boardroom, part of which saw chief executive designate Kevin Cummings — who only replaced company veteran Nigel Stein in the hot seat in September — leave the company with immediate effect.

Turning the corner?

The shocking updates of late last year have seen brokers strike down their profits forecasts with gusto, and GKN is now expected to record a 12% earnings dip for last year.

But the City expects the engineering ace to get back to winning ways with a 17% profits improvement this year, and for the company to follow this with a 10% rise in 2019. And these forecasts result in a forward P/E ratio of 13.6 times, some way below the widely-regarded value benchmark of 15 times.

Clearly the business is not without its troubles, and the review of its North America operations could throw up yet more horrors. But under the stewardship of new chief executive and former Ford exec Anne Stevens, who plans to separate its Automotive and Aerospace operations, I am hopeful that GKN may be about to turn the corner.

Electric dreams

Investors should not forget that the Redditch-based business remains one of the jewels in the crown of British engineering with a pivotal role in the global car- and plane-building markets.

Indeed, over the weekend it announced that a number of significant contract wins from the world’s major auto-builders pushed its order book for its electric driveline (or eDrive) technologies to £2bn by the close of the last year.

The huge investment GKN has ploughed into these next-gen technologies is clearly delivering the goods, the Footsie firm now expecting to create eDrive sales of £275m by 2020, up from its previous target of £200m and surging from revenues of £33m in 2017. And turnover here is expected to sprint to £500m by 2022, the company added.

The troubles at GKN have of course attracted the admiring glances of Melrose Industries. The business — which specialises in the acquisition and transformation of distressed engineering firms — tabled a £7.4bn hostile takeover just last week after pitching up earlier in January.

Stevens has rebuffed the offer, stating that the terms “fundamentally undervalue the company,” but another bid is likely to be just around the corner given GKN’s dominant position in key industries. But whether or not this transpires, I reckon the future remains very bright for the industrial star.

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Royston Wild has no position in any of the shares mentioned.  The Motley Fool UK owns shares of GKN and Melrose. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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