SIF Portfolio: GKN - Plus Why Costain Could Still Be A Sector Pick

13th Mar '18 by Roland Head

6 comments 5012 reads

I have a new stock to consider for the portfolio this week, but first I’m going to take a quick look at the latest news regarding portfolio stock GKN.

Melrose Industries’ hostile bid for FTSE 100 engineering group GKN has grabbed a lot of attention in recent weeks. I added GKN shares to the SIF portfolio when they qualified for my screen in the wake of Melrose’s original offer in January. The stock has been in a holding position since then, awaiting further events.

The final straight?

This process now seems to have entered its final phase. Melrose made a final offer for GKN on Monday morning, with an acceptance deadline of 29 March. The offer document valued this offer at 467p per share. However, this calculation appears to have included last year’s dividend and to have been based on a higher Melrose share price.

The offer is made up of 1.69 Melrose shares and 81p for each GKN share. Based on Monday’s closing price I estimate this is worth around 442p of new money to GKN shareholders. That’s a 30% premium to GKN’s pre-offer price, but is 61p less than the sum-of-the-parts valuation of 503p suggested by GKN management in their latest defence document.

GKN’s board only took a few hours to reject Melrose’s final offer, but at least one major fund manager has now come out in favour of the Melrose bid. The final outcome seems likely to be based on management credibility, as both teams are suggesting similar measures to turnaround the engineering group.

If Melrose is successful, I’ll sell the portfolio’s virtual shares before the takeover completes. This is because Melrose doesn’t pass my screening tests, so it isn’t eligible for the portfolio.

New screening results

The SIF screen has offered up a number of tempting stocks this week. However, the rules require me to rank the results by StockRank. The top-ranked eligible stock is FTSE SmallCap infrastructure and engineering group Costain.

I came close to ruling out this firm because the portfolio already owns shares of groundworks specialist Keller. However, in the end I decided that Costain’s UK focus meant that its fortunes wouldn’t overlap too heavily with Keller’s global operations.

These diversification decisions are inevitably quite subjective and often…

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The Phoenix

13th Mar '18

Hi Roland both Costain and Sevenfield come up on my screen would you still pick Costain over Severs given Severs has better operating margin, the sector does seem out of favour at the moment due to Carillion and I do wonder if some of the fall out from that is yet to filter down to the mid size players

Star8

14th Mar '18

Roland

Re GKN - I think the offer also lets the investor get the final dividend of 6.2p - but I may be wrong.

The shares go ex div on 5th April 2018 so if the dividend is not included in the offer consideration, investors should wait to accept the offer (if they so wish) until after 5 April in which case they will get the dividend. While the closing date for the offer is 29 March it is normal practice for the offer to be extended. Offerors typically want to get the largest percentage possible of the target and so there can be several closing dates.
In the GKN example - see Expected Timetable - page 13 of the offer document note 4 : the offer will be kept open for acceptances for at least 14 days following such date ( as the latest date for the offer to be declared unconditional) which is 2 April.
In other words if the offer succeeds then one has at least until 16 April to accept - which very conveniently for private investors, takes the individual into a new tax year (2018-2019) and so tax on the gain is payable in January 2020 instead of January 2019. (A separate important point ).

In reality later dates for final acceptance maywell be allowable but to explain that would be to go into the minutia of the Takeover Code.

Also companies have to give notice of delisting the shares of their acquisition and it is usual to allow dissident investors to accept the offer in order not to be minority investors in an unquoted company.

The above are snapshots of what could be a complex situation.

BTW how did you get the May 2015 Stock Rank ?

Roland Head

Hi Star8,

You're right, the Melrose Industries (LON:MRO) offer for GKN (LON:GKN) does include the dividend. I excluded it from my calculation on the basis that it's already been 'earned'. Shareholders will get the dividend regardless of whether the deal goes ahead.

I agree that the offer may be extended - in a big cap deal like this investors should have plenty of notice and be able to plan accordingly.

I had the screenshot showing the Costain (LON:COST) 2015 StockRank saved in my files from when I wrote the original article!

But you can get this online using the Print history facility. Just click on the arrowhead on the grey 'Print' button below the market cap column at the top of each StockReport:

You can then choose the year and month you want (it's a long scroll to get to May 2015!).

Hope this helps,

Roland

Hi clarea,

Severfield (LON:SFR) seems to have performed quite well over the last couple of years, but it doesn't qualify for my screen at the moment, so I wasn't able to consider it.

Regards, Roland

sharw

Roland - I have been looking at this one recently and wonder whether there is more to the drive into the technological end that you highlight as the differentiator. Do Keller or Morgan Sindall who you mention employ 22 PhDs and sponsor a further 21? That and more from the recent presentation:

http://costain.com/media/598410/c-users-donbow-desktop-results-2017-costain-plc-fy-results-presentation-1-march-2018.pdf

This move to the "smart" end (slides 20,21,22) could be what will set Costain (LON:COST) apart from the rest of the sector.

15th Mar '18

sharw - I share this view that a focus on technology and programme management means that Costain (LON:COST) is able to add much more value to customer projects than many (most?) of its peers.

In my opinion, another example of this forward thinking was the £75m placing and open offer done by the firm in 2014. This didn't appear to be necessary at the time and raised some eyebrows. But the company's argument was that the extra liquidity would improve its ability to win big contracts.

Given the progress made since then (while maintaining a robust net cash balance) I think this decision has been vindicated. Even more so when you consider the troubles that have befallen some sector peers...

Regards,

Roland

SIF Portfolio: GKN - plus why Costain could still be a sector pick

The final straight?

New screening results

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Roland Head

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