What’s new:
• Sold energy business to Siemens
• Profits weighted to second half
• Still see growth returning next year
Put national pride to one side and the decision by Rolls-Royce (RR.) to sell most of its energy division to German rival Siemens looks like good business. Rolls will get £785m in cash for the gas turbine and compressors operation, plus another £200m for a 25-year licensing and parts deal. That's more than expected and equivalent to a hefty 14 times last year's underlying profit of £72m. It's all part of chief executive John Rishton's focus on the core business. Rolls will have no problems spending the money.
It has already agreed to pay Daimler almost £2bn for its half of their power-systems joint venture Tognum, and Rolls clearly wants to invest in "areas of business where we can add most value". The group does face headwinds in 2014. Mr Rishton warned in February of a "pause" in growth this year, mainly due to a slump in defence profits; a quality issue at the marine division will cost £30m to fix; and foreign exchange will trim £40m off profit. Rolls also confirmed a week before the Siemens announcement that two-thirds of profit will be made in the second half. A probe into corruption in the Far East is ongoing.
JP Morgan Cazenove says...
Overweight. We estimate the disposal will cut earnings by 3-4 per cent from 2015. Acknowledging uneven GDP growth globally and other market headwinds, we also take the opportunity to trim our 2014-17 estimates by a further 2-3 per cent. We now expect adjusted EPS of 64.5p this year and 79.8p in 2015. After applying a target 2015 PE ratio of 17 and enterprise value to underlying profit ratio of 14, we trim our December 2014 price target by 4 per cent to 1,300p.
Barclays says...
Underweight. We conclude that the 'pause' in growth will likely extend into 2015 and 2016. Rolls has high exposure to a single aircraft that has yet to enter service (the Airbus A350), and faces significant cash and margin headwinds, accounting concerns and questions over capital allocation. With three years of low-to-mid single-digit EPS growth ahead, we do not see a compelling reason for the shares to re-rate over the next 12 months. Valuing Rolls in line with the European sector average, we lower our target price by 24 per cent to 930p.
