GKN SHARES changed into a higher gear some weeks ago as word got around that yesterday's interim results would be better than expected. So a 12p fall to 383p amounts only to mild profit-taking as a superior 37 per cent increase in pre-tax profits to pounds 65.1m duly appeared.

The shares have had a good run this year, outperforming the stock market by over a third. This is fully justified by the first-half figures, which reflect the first significant fruits of a hefty rationalisation programme that has taken 7.5 per cent of the workforce out over the past 18 months, together with a buoyant performance in Germany and North America.

A measure of how well GKN, under its chairman, Sir David Lees, has done in managing its two designated core businesses is that automotive driveline systems and the Chep pallet pool are making higher profits than at the peak of the activity cycle in 1989.

But the battering suffered by non-core activities, whether commercial vehicle parts, scaffolding, or the 39 per cent stake in United Engineering Steels, means that whereas group pre-tax profits hit pounds 215m in 1989 they are likely to come in a few million either side of pounds 130m this year.

A 1 percentage point improvement in trading margins, excluding the impact of lower redundancy and rationalisation charges, is impressive enough. But GKN has also shown that it can keep a tight grip on cash flows, generating a small inflow and lowering gearing slightly to 25.4 per cent despite poor markets.

All this provides comfort, if it were needed, that the full-year total dividend will be maintained at 20.5p and is likely to be covered by earnings of about 22p without jeopardising the company's balance sheet.

So a 7.1 per cent yield looks secure and attractive. But it is unlikely to grow for a couple of years and a further advance in the shares in the short term is open to question.

Car production is running ahead of registrations in GKN's relatively buoyant North American and German markets. If manufacturers announce production cuts this autumn or winter it could hit sentiment. Conditions outside the core remain torrid. The company has demonstrated long-term qualities but the shares are likely to tick over for now.

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