FREE

Institutional Comment: Aerospace sites visit: More spars than in Master and Commander

A visit to two of GKN’s flagship aerospace sites near Bristol highlighted both the company’s positives (skills in complex subassemblies constructed from especially challenging materials, including titanium and composites, and supply chain management) and negatives (the burden of building up volume and reducing quality problems on the A350 and A400M wing spars). Our key conclusions are that almost alarming levels of work in progress at the Western Approach facility suggest some downside to 2014e cash flow, but this could reverse faster than expected in 2015e. In the near term, we think GKN has its work cut out to address the ongoing quality, rate and production issues at the two sites to Airbus’ full satisfaction, despite the company’s conflicted position as both end customer and supplier of major components. GKN has previously suggested that at group level, management feels ready and able to carry out another major acquisition, with aerospace a favoured market. We note that Bombardier has indicated its willingness to “participate in industry consolidation” with its FY14 results and financing plan. We note, however, the Canadian company’s guidance for c 4% operating margins (on $1.8bn of revenues) compares very unfavourably with the 11%+ margins that we forecast for GKN Aerospace in 2014e.