Rolls-Royce acts to appease investors with £1bn buyback

Aero-engine maker shelves acquisition plans in wake of shock profit warning
  • @MLeftly

Rolls-Royce, the troubled aero-engine manufacturer, has moved to win back  the support of investors with a £1bn sweetener as it shelved plans for major acquisitions.

Rolls’ chief executive, John Rishton, has been under pressure since a shock warning in February that a decade of profit growth would come to a halt this year due to defence spending cuts. The announcement hit the share price.

At an investor strategy update, he launched a share buyback with the proceeds of the sale last month of Rolls’ gas turbines business to the German engineering giant Siemens, sending the shares up 8 per cent, to 1,092p. That still leaves them nearly 20 per cent lower than at the start of the year, but this is partly down to concerns surrounding a Serious Fraud Office investigation into the engine maker over corruption claims.

The buyback ends hopes that Rolls would make a large acquisition to rebalance the business and offset the impact of cuts at the Ministry of Defence and the Pentagon.

Earlier this year it emerged that Rolls had tried to snap up its Finnish rival Wartsila – a move that would have boosted its marine engineering work, such as designing ships. The deal would have been worth in the region of £8bn, and though the talks collapsed almost immediately, analysts had speculated that Rolls was on the acquisition trail.

Mr Rishton confirmed that “no material acquisitions are planned”.

He also confirmed financial guidance for 2014 and 2015, allaying fears of further downgrades after last week’s news that Dubai’s Emirates airline had cancelled an order for 70 A350 aircraft. The planes  would have been powered by Rolls engines and the order book was hit by £2.6bn.

At the event for investors, Mr Rishton also updated them over the way Rolls accounts for the sale of equipment and services in a division known as TotalCare. The accounting regulator demanded a reassessment of its 2013 figures, which saw nearly £40m wiped off last year’s profit.

Analysts were in agreement that the buyback was the best news in some time from Rolls. Espirito Santo said it showed management was “committing itself to very tight capital discipline”, while Ben Bourne at the broker Liberum  pointed out that there had  “been plenty of food for the bears recently” so the reiteration of guidance would be “well received”. He added: “No material acquisitions are planned, which is a relief as many investors were concerned they would make another play for Wartsila post July, requiring more equity.”

Sash Tusa, analyst at Edison Investment Research, said: “We are pleased that the company is responding to the market by returning circa £1bn to shareholders.”

Rolls powers over 30 types of aircraft and is the world’s second-biggest manufacturer of military aero-engines, and it is also developing its nuclear business. Earlier this week it signed a memorandum of understanding with CGN, a Chinese nuclear group, to provide engineering support.