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By Sarah Young

LONDON (Reuters) - Britain's GKN said on Tuesday it could cope with the impact of a weak dollar versus the pound after reporting a 17 percent rise in 2013 profits and forecasting strong demand for car and airplane parts.

The group, which makes chassis and axles for carmakers such as Volkswagen and airframes for planemakers Airbus and Boeing, forecast that its auto business would grow this year at a faster rate than an anticipated 3 percent expansion in the market, and said its aerospace unit would post higher sales.

But Chief Executive Nigel Stein said: "The dollar is going to be a headwind. It's been a tough start." He said a one percent move in the dollar would have around a 4 million pound impact on profit, but he was confident that the company could offset that.

"This should be outweighed by the benefits from the group's diverse exposure to global markets, strong customer positions and healthy order books."

Shares in GKN fell more than 2.0 percent, making it one of the top fallers in Britain's bluechip stock index. Analysts attributed the drop partly to the stock's strong run - the shares have risen 11 percent since the start of 2014 and 64 percent in the last twelve months - plus worries over adverse currency movements.

Analysts at Investec said they expected to tweak their forecasts to account for the foreign exchange moves. Jefferies added that the comments on currency could be seen as disappointing.

"Today's 2013 result is ahead of our forecasts, but the 2014 outlook may not be enough to add momentum to the equity story. It all reads like good news, but it may already have been anticipated," Jefferies said.

The company reported underlying pretax profit of 578 million pounds, ahead of a company-supplied consensus forecast of 565 million pounds.

The profit increase was supported by a strong performance in GKN's automotive business, which accounts for about 45 percent of sales.

In its aerospace unit, which makes up about 30 percent of total sales, GKN benefited as commercial aircraft makers built more planes. But lower demand for military plane parts due to government defence cuts was a drag on the business and was a trend which Stein said showed no sign of changing.

The U.S. government said on Monday it would shrink the country's Army to pre-World War II levels, with a fiscal 2015 budget proposal due to have a major impact on many weapon programmes.

Within its aerospace unit, GKN increased its share of sales to commercial customers to 73 percent, with military customers accounting for 23 percent of sales.

GKN's commercial aerospace performance last year was significantly enhanced by its first full year of ownership of Volvo Aero, a business it bought for 633 million pounds in 2012.

Stein said GKN continued to assess other acquisition opportunities in aerospace. The company has in the past been linked with a wing factory in Tulsa, Oklahoma being sold by U.S. company Spirit Aerosystems.

"We're ready to look for other opportunities but only for the right opportunities," Stein said, adding in reference to Tulsa: "It's known to be for sale. I think it would entirely logical to assume that GKN has an interest."

Analysts at Canaccord earlier in February estimated that GKN could spend up to 2 billion pounds on acquisitions.

The company, which has a market capitalisation of about 6.8 billion pounds, also on Tuesday lifted its dividend by 10 percent to 7.9 pence per share.

(Reporting by Sarah Young; Editing by Brenda Goh and Jane Merriman)