Ignore Rolls' brave new world

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The Independent Online
Decision time is approaching for shareholders contemplating whether to take up shares in the £331m placing and open offer announced last month by Rolls-Royce, the aero-engine maker.

Those who want to take up the new shares, being offered at 154p on the basis of one for every 5.4 held, have until a week tomorrow to send in their applications.

Anyone who has remained aboard since the flotation in 1987 will justifiably feel that the company, chaired by Sir Ralph Robins, is again asking shareholders to put hope before experience. Offered at 170p in two tranches of 85p, the shares have gone nowhere, standing at 170p, up 0.5p, yesterday.

They topped 220p at one stage in 1990, in the last gasp of the 1980s boom, before the reality of the 1990s recession sank in. Since then, famous- name US airlines have been bankruptedand defence budgets have been slashed in the wake of the collapse of the military threatfrom the east, hitting engine sales and forcing Rolls to cut the dividend for 1992.

The company isopening up the prospect of a brave new world based on the $525m acquisition of Allison, a large US aero-engine manufacturer that should give the British company probably the best range in the world. In future, Rolls-made engines willcover virtually any requirement, from the huge turbo-fans used on Boeing 777s to helicopter engines.

As well as increased coverage of the market, analysts point to two other factors supporting Rolls' argument that Allison will make it a stronger company.

It will give it a significant manufacturing presence in the US for the first time, trebling its procurement in this key market to about $1.5bn. That should help offset the inherent currency exposure of a British company operating in a dollar-denominated market.

Concurrently, it will give Rolls access to a much bigger pool of users through Allison's customer base.

The general outlook also showssigns of marked improvement. Engine orders are expected to pick up from60 this year to 110 in 1996 as big deals such as Tornados for Saudi Arabia under the Al Yamama project get off the ground. Next year will also see the firstnew EH101 helicopters being supplied to the Royal Navy.

Peter Deighton, of the brokers Smith New Court, looks for profits of £150m this year, rising to £245m next, putting the shares on a prospective price-earnings ratio of nearly 12 two years out. But, given the lacklustre record, that still looks too high to justify taking up the shares.