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Growth 'pause' flattens Rolls-Royce

RESULTS: Rolls-Royce did well in 2013 and the fallout from this profits warning may provide a good entry point
February 14, 2014

In an era where valuation multiples are pricing in perfection, anything less is dealt with harshly. And so it was with aero engineer and Britain’s industrial flag-bearer Rolls-Royce (RR.), which warned that neither revenue nor profit would improve this year. “This is a pause, not a change in direction, and growth will resume in 2015,” pleaded chief executive John Rishton, but his attempt to reassure fell on deaf ears as analysts made a mad scramble to slash forecasts.

IC TIP: Buy at 998p

At its worst, almost £4bn was wiped off the value of the company. Rolls blames ongoing budget cuts in the US and Europe for much of the bleak forecast. Its defence-aerospace order book plunged by a fifth last year, and despite aggressive cost-cutting, it expects revenue there to fall by 15-20 per cent in 2014. Fewer orders for its propulsion systems from the offshore industry will hit marine sales, too, although profits should grow modestly.

Elsewhere, the picture is rather better. If Rolls is right, both the energy and nuclear and power systems divisions will generate “good growth” in profits this year. More importantly, so will the giant civil-aerospace business, where the order book has swelled 22 per cent to over £60bn. And Mr Rishton admits that “on cost, there is more to do”. Indeed there is - though low utilisation levels at some factories will self-correct as deliveries ramp up this year and next. And, importantly, free cash flow of £781m should be repeated in 2014.

Last year’s numbers were actually near most City estimates. Stripping out big profits in 2012 on the sale of Rolls' stake in International Aero Engines (IAE) and on foreign-exchange contracts, pre-tax profit actually rose 23 per cent, giving underlying EPS of 65.6p. Year-end net cash was about £600m better than expected, too. Revenue was up across all the divisions, and only marine saw profits fall.

ROLLS-ROYCE (RR.)

ORD PRICE:998pMARKET VALUE:£ 19bn
TOUCH:997-998p12-MONTH HIGH:1,294pLOW:    941p
DIVIDEND YIELD:2.2%PE RATIO:14
NET ASSET VALUE 298p*NET CASH:£1.9bn

Year to 31 DecTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)**
200910.4-1.8912015.0
201011.11.1329.216.0
201111.11.1946.017.5
201212.22.7712519.5
201315.51.7673.322.0
% change+28-36-42+13

Ex-div: 23 Apr

Payment: 01 Jul

*Includes intangible assets of £5bn, or 265p per share

**Paid via an issue of C shares