News Column

Stocks rocked by Rolls-Royce growth warning

February 14, 2014


ROLLS-ROYCE said its profits fell more than a third in the last year, and warned there will be no growth in 2014 either, sending its shares tumbling almost 14 per cent and dragging the FTSE 100 lower yesterday.

The engineering giant reported pretax profits of 1.76bn, down 36 per cent on the previous year, though the firm said that earnings were up 23 per cent once currency changes, derivatives movements and one-offs are taken out.

"In 2014, we expect a pause in our revenue and profit growth, reflecting offsetting trends across the business. This is a pause, not a change in direction, and growth will resume in 2015," said chief executive John Rishton.

Revenues last year rose 19 per cent to 15.5bn, but excluding the recentlyacquired engineer Tognum the growth rate was a more modest six per cent.

"It's clearly shocked the market...It's a weaker backdrop than we have factored in previously. It's dragged everything else down," said Investec analyst Chris Dyett, who cut his profit guidance by about 11 per cent.

Rolls-Royce and its rivals have been under pressure as the UK and US governments rein in defence spending, leaving them searching for growth with contracts in new markets.

The company yesterday forecast a 15 to 20 per cent drop in defence revenues in the coming year, which will be offset by "modest growth" in civil aerospace and more orders in its energy unit.

Rolls-Royce said it was too early to put a price tag on the Serious Fraud Office's probe into claims of bribery and corruption, which "could include the prosecution of individuals and of the group". Two men were arrested as part of the SFO's investigation on Wednesday.

ANALYST VIEWS By Marion Dakers HOW DID YOU TAKE ROLLS' RESULTS AND OUTLOOK FOR THE YEAR? SASH TUSA ESPIRITO SANTO Rolls' management is likely to focus on the operational challenges associated with the falling defence backlog and transition to a high level of Trent XWB deliveries. [T]he continued news-flow concerning the SFO investigations... [is] likely to be an unwelcome distraction, but not core to the investment case.

JONATHAN JACKSON KILLIK & CO We see this as a pause in an attractive great long-term growth story, and remain positive on the shares, which provide exposure to the theme of growing air travel. We would use the weakness in the stock as a buying opportunity.

SANDY MORRIS JEFFERIES Defence takes a sharp step back to where it was in 2010. Then, Rolls-Royce indicates growth will resume. We saw it coming to a degree, but were wrongfooted by defence doing better than we expected between 2011 and 2013.

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Source: City A.M. (UK)

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