Rolls-Royce warns of ‘challenging’ 2016
Shares in Rolls-Royce fell almost 5 per cent on Thursday after the UK engineering company warned “2016 continues to be a challenging year overall”.
Although Rolls-Royce stuck to its existing profit guidance for 2016, some analysts highlighted that the company is now counting on a strong performance in the second half of the year to offset a weak first half.
Rolls-Royce has issued five profit warnings since February 2014, because of problems at its civil aerospace, defence and marine businesses. Warren East, chief executive since July 2015, has embarked on a major restructuring to improve efficiency.
Speaking before Rolls-Royce’s annual meeting on Thursday, Mr East said: “Despite steady market conditions for most of our businesses, 2016 continues to be a challenging year overall as we sustain investment and start to transition major products in civil aerospace, and tackle weak markets in marine.”
He added trading so far this year was in line with the company’s expectations.
In late morning trading, Rolls-Royce’s shares were down almost 5 per cent at 613p.
The downturn in the oil and gas sector because of the plunge in crude prices since mid-2014 has undermined demand from the offshore energy industry for Rolls-Royce’s engines.
The company is also contending with a tricky transition from current to next generation engines used in passenger jets made by Airbus and Boeing.
In its last profit warning, Rolls-Royce in November alerted investors to a £650m hit to its 2016 earnings due to certain negative factors, including how airlines were retiring older jets that had its engines installed on them.
On Thursday the company said its profit before finance charges and tax for 2016 would be “significantly weighted towards the second half, with the first six months of the year expected to be close to break-even”.
“Looking to the balance of the year, the second half outlook reflects increased large [jet] engine deliveries, good underlying growth in after-market [service] revenues and expected incremental benefits from our ongoing restructuring programmes,” it added.
Rolls-Royce said it was on track to deliver cost savings of between £30m and £50m this year.
Nick Cunningham, analyst at Agency Partner, said: “The weak first half leaves a lot to do in [the second half], especially in challenging conditions and visibility is limited in some of the segments (eg marine and power, civil engines to some extent).”
Rob Stallard, analyst at RBC Capital Markets, said: “Rolls normally has a heavy weighting to the second half in its results, though the scale of the 2016 skew is particularly stark. Nothing in [first half] — everything in [second half].”