Rolls' FTSE status at risk

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The Independent Online

Shares in Rolls-Royce plunged by more than a fifth yesterday, threatening its status in the FTSE 100 index, after the aero-engine manufacturer warned that profits would stagnate next year.

Shares in Rolls-Royce plunged by more than a fifth yesterday, threatening its status in the FTSE 100 index, after the aero-engine manufacturer warned that profits would stagnate next year.

The shock warning sent the shares tumbling 22 per cent, wiping more than £700m from Rolls' market capitalisation, and prompted a rash of downgrades from analysts.

Sir Ralph Robins, chairman, shrugged off worries that the sharp drop in Rolls' valuation would leave it vulnerable to a bid and said he had full confidence in the company's management.

Rolls blamed its forecast of flat profits for 2001 on a lower contribution to sales from its lucrative engine spares business, delays to the industrial Trent engine programme and further rationalisation charges.

In addition to a £120m provision to cover the increased costs of bringing the industrial Trent into service, taken in this year's accounts, Rolls will also incur £150m of exceptional restructuring charges over the next three years. The restructuring programme will result in 2,000 job cuts next year on top of 3,000 this year. All the job reductions next year will come from natural wastage and early retirement.

Sir Ralph stressed, however, that Rolls expected profits to start growing again in 2002, although he would not commit the company to the double-digit earnings growth that it has achieved in each of the last four years. Sir Ralph, who was subjected to a two-hour grilling by analysts, described the share price reaction as "pretty overdone" and said he would be disappointed if Rolls did drop out of the FTSE 100. "This is a highly undervalued company. Given the fact that we will have one year of flat earnings, this seems to be me to be an extraordinary reaction."

The main brake on profit growth will be the increase in the proportion of Rolls' civil aerospace business accounted for by new engine sales, as opposed to spares sales, next year. Rolls makes most of its profits in civil aerospace from spares sales and Sir Ralph admitted that some engines were sold at a loss, particularly when Rolls was seeking customers for new engines.

The delay to the industrial Trent programme, caused by difficulties in meeting tougher emissions targets, means full production of the engine will not start until 2002. Rolls has overcome the problem of excessive nitrous oxide emissions with the help of Cambridge University scientists but it will still have to spend £120m retrofitting engines already supplied to seven customers and paying them compensation. The one-off provision resulted in a 76 per cent fall in first-half profits to £38m but underlying profits, boosted by the acquisition of Vickers, rose 26 per cent to £195m.

Despite the profits setback, Rolls expects to deliver 1,200 civil engines next year - almost as many as General Electric - compared with 400 in 1996. John Rose, chief executive, said this would establish Rolls as "the genuine number two and a number one contender" in the world engine market. Rolls presently accounts for 14 per cent of all civil engines in service, which gives it an aftermarket worth £14bn. But Mr Rose said this was growing at the rate of £3bn a year because of the huge step change in engine deliveries.

Rolls is shortly to submit a request to the Government for refundable launch aid for the proposed Trent 600 and 900 engines which will power the next generation of Boeing and Airbus super-jumbos. A decision on whether to sell the Vickers Challenger tank business or merge it with another tank maker will be taken in the autumn after Rolls has discovered whether it has succeeded in a £1.5bn bid to supply the Greeks with 250 Challengers.

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