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Rolls-Royce looks to move on

The market reacted positively to news that the beleaguered engineering group had reached a settlement with authorities over outstanding bribery and corruption charges
January 17, 2017

The record settlement by Rolls-Royce (RR.) of a number of outstanding bribery and corruption claims has put an end to some uncertainty facing the stock.

IC TIP: Hold at 717p

The shares rose as much as 8 per cent on the day it agreed to pay £671m in a deferred prosecution agreement, split between the UK's Serious Fraud Office, the US Department of Justice and Brazil's Ministério Público Federal. The UK's £497.2m share was a record British fine for criminal conduct by a company. It's important to note that Rolls will pay roughly £293m in the first year across all three agreements.

The stock's rise may also have been driven by news that the company had a "good finish to the year with both profit and, in particular, cash expected to be ahead of expectations". This could, therefore, be a turning point for the company whose shares remain 45 per down on their January 2014 peak of 1,271p.

Presumably, any cash surge is partly a consequence of sterling's ongoing weakness in currency markets, but we shouldn't be too churlish; full-year figures may well reveal that improved treasury management will lead to free cash outflows at the lower end of the £100m-£300m guidance.

The group is intent on allocating capital to the most profitable business segments. A month or so before the settlement, the group announced it would axe 800 jobs in its marine business, responding to faltering demand from shipping and energy customers.

News on the settlement overshadowed renewed media interest in a potentially transformative work programme that Rolls-Royce and partners, including Amec Foster Wheeler (AMFW) and Arup, are looking to progress as part of a government initiative to develop and commercialise small modular reactor (SMR) technology. Last year (Britain's Transforming Economy, 16 September 2016), we highlighted proposals by the group to develop an SMR capable of producing 220-440MWe, but small enough to be transported on a truck, train or barge.