The City turned on Rolls-Royce today as the aerospace and defence giant warned a decade of profit growth would come to a shuddering halt this year, wiping £3.3 billion off the value of the firm.
Just hours after arrests in London stemming from a Serious Fraud Office probe into the engine maker over corruption claims, chief executive John Rishton admitted there would be a “pause in growth” for the first time since 2003, after US defence budget cuts and the completion of export programmes to the Middle East and India.
Rishton expects the 130-year-old FTSE 100 stalwart to return to growth in 2015 and profits to be stronger in the second half of this year. But shares crashed 177p to 1034p or 15 per cent down.
The sell-off completed a miserable 24 hours for Rolls after “intermediaries” were arrested in raids as part of the probe into Rolls-Royce’s dealings in Asia launched just before Christmas. Rishton said the firm “continues to help authorities completely” with their investigation.
Pre-tax profit jumped 23 per cent to £1.76 billion on revenues up 27 per cent to £15.5 billion. The order book was impressive, up 19 per cent to £71.6 billion, but analysts focused on the growth blow.
US and European governments have been slashing military spending in a bid to rein in ballooning budget deficits, but the impact has been slow to hit some companies due to slow decision making among lawmakers and the long-dated nature of defence equipment contracts.
Rishton cited possible cuts by the US on the size of its Lockheed Martin-built C-130 transport fleet, and the completion of delivery of two of its major export programmes — the Eurojet EJ200 engine to the Middle East and the Adour engine to India — as the reasons behind the expected decline.
“In short, defence takes a sharp step back to where it was in 2010,” Jefferies analysts said. “We saw it coming to a degree, but were wrong-footed by defence doing better than we expected between 2011 and 2013.”
Rishton is also focused on containing the fall-out from allegations of bribery in India and China. For the past year, Conservative peer and former Herbert Smith partner Lord David Gold has been looking at Rolls-Royce’s ethics.
Rishton said: “David Gold’s review into compliance is going well; he has done some terrific work. It is absolutely essential that we don’t make any mistakes in this area.”