Sunday 18 March 2018

Iconic Rolls-Royce is having something of a bumpy ride

Rolls-Royce logo
Rolls-Royce logo

John Lynch

It's extraordinary how the reputation for quality engineering at Rolls-Royce has existed, persisted and prospered down the decades. Now in its 108th year, the London-based company is valued at £20bn (€25bn), with sales of £15bn (€19bn) and is a constituent of the FTSE100.

Rolls-Royce Holdings (RRH), it is a UK multinational producing engines for civil and military aircraft, power systems for ships and power generation. It is also the second-largest aircraft engine producer in the world after General Electric (GE).

Originally set up to manufacture high-quality motor cars, it was producing aircraft engines by the start of the Great War. Between the wars it developed the extraordinary Merlin engine. Used in World War Two, some people credit the winning of that war to that famous engine.

However, its engineering reputation was not enough to prevent the company getting into bother - in common with much of the rest of British industry - in the late 1960s and 1970s. It was actually forced into receivership in 1971, and nationalised. As a result the company was split, the car division sold and the aero engine business went its separate way. It was privatised in 1987.

RRH is a big player, employing 55,000 people in more than 50 countries, with customers in 150 countries worldwide. It has four units. Its civil aerospace unit produces engines for large and regional aircraft. The defence unit makes engines for combat, tactical and trainer aircraft and helicopters. Its marine unit has a wide range of engine products, while the energy unit provides a range of engines for power, oil and gas operations.

The company's civil aero unit is the group's largest revenue generator, with sales of £7bn (€9bn). It enjoys a market share of 48pc, just below that of GE. However, its operating margins of 12pc is way below that of GE's 20pc. Over half of the sales are to large aircraft producers Airbus and Boeing. Defence and marine units both have sales of £3bn (€4bn), but defence profits of £400m (€500m) are double that of marine. Half of defence sales are for transport aircraft and one-third for combat aircraft. The marine unit supplies over 70 navies around the world and generates one-third of the unit's revenue and one-fifth comes from merchant vessels.

Finally, RRH Energy unit is the smallest, but it still has sales of £1bn (€1.2bn).

Last December, investors in the company were shaken when the British Serious Fraud Office launched a criminal investigation into alleged bribery in Indonesia and China, problems not uncommon in the global business. This coincided with a pause in the company's growth projections for the first time in a decade and its profit warning wiped almost £4bn (€5) off the market value. Predictably, it has taken the axe to its costs, but some costs-savings targets have been scaled back. In spite of this, revenue will decline by up to 15pc this year.

Recent half-year results show a 20pc drop in profits and revenue down 10pc, due to weak defence and marine performance, the strong pound and severance payments. Last year the RRH reduced its headcount by 10pc, and has indicated it will continue to trim the same number this year.

For investors the good news is that the company expects an improvement in profit, lower costs and increased revenues in the second half of 2014.

Further positive news came with the announcement of a £1bn (€1.2) buyback commitment, following the sale of some energy assets to Siemens, as the company opted to reward the shareholders in preference to a major acquisition. RRH is a well-diversified company with good products, strong market share, particularly in the civil aero segment, which in the next 20 years could be worth £3trn (€3.75trn).

Its share price is £10.46 (€13), ahead of its low of £2.50 (€3.12) five years ago, but below its yearly high of £12.77 (€15.97). The company's price-to-earnings multiple of 9 is not demanding.

While Rolls-Royce is planning a return to growth next year, now may not be the time to invest, as greater visibility of the full-year results would be prudent.

Irish Independent

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