Liberum upgrades GKN to 'hold', target price steady

Although the aerospace and auto engineer's third quarter update had underwhelmed, the broker had already been anticipating operational challenges, pricing and transition risk at GKN as far back as January.

There was also scope for 'upside' from the fall in the company's pension deficit, which some considered to be a big hurdle to a 'break-up'. As well, there was "considerable" headroom for cash generation to improve.

Regarding the faling pensions shortfall, Liberum said that "activists will be watching".

Nevertheless, Liberum cut its 2017 and 2018 earnings per share estimates for the company by 9%, with the two customer claims flagged up in its Q3 statement subtracting 5% from its estimated 2017 PBT and margin pressures for 4%.

In 2018, lingering problems around lower margins and FX were now a headwind, leading the broker to cut its estimate for that year by 9%.

The outlook for growth was also precarious, Liberum said.

Yet with the shares down 20% from their March highs and with the broker's sum-of-the parts valuation reflecting a 2018 EV/EBIT multiple of 9.0 and the pension post tax, the 9p dividend per share implied no 'downside'.

Hence Liberum's decision to move from a 'sell' to a 'hold' with its target price steady at 300p.