Rolls-Royce defies downturn thanks to Middle Eastern deals

Rolls-Royce, Britain's biggest manufacturing company, has so far managed to confound the economic slowdown, it said yesterday, with a series of new contracts enabling it to boost sales and profits.

Shares in the aerospace company have fallen sharply this year amid speculation that the airline sector, Rolls-Royce's key customer, would be forced to put investment plans on hold because of the soaring cost of jet fuel.

However, Sir John Rose, Rolls-Royce's chief executive, yesterday said commodity-rich countries in the Middle East and Asia now account for around 40 per cent of its orders, providing protection from a slowdown in the West. As a result, the company managed to increase pre-tax profits by 3 per cent to £389m in the first half of the year, with sales up 13 per cent to £4.05bn. That performance has enabled Rolls-Royce to increase its interim dividend by 42 per cent.

The company also appears to be suffering no lack of business, with its forward order book up by 17 per cent to £53.5bn.

Despite the fears of some critics, Rolls-Royce's civil aviation business continues to perform very strongly, with a 17 per cent increase in orders to £42.1bn. "Rolls-Royce's exposure to new wide-body programmes and a young fleet age should ensure the company is able to continue to post growth," said Rupinder Vig, an analyst at Morgan Stanley. The company's market leadership was underlined by an impressive performance at the Farnborough Air Show last week, where it won orders for engines and maintenance contracts worth more than £4.5bn, significantly ahead of rivals.

Sir John said there was no reason to expect a downturn during the second half. "The fundamentals of the business are strong," he said. "We recognise that there are risks in civil aviation, but the shape of the civil business makes us more resilient than in the past."

While civil aviation contracts account for around four-fifths of the company's forward order book, Rolls-Royce has in recent years diversified into a number of other areas. It said yesterday its marine division had been a particular beneficiary of "high levels of activity in the oil and gas sector", with forward orders up by 17 per cent. Its defence business has increased orders by 11 per cent.

Howard Wheedon, an equity strategist at BCG Partners, said Rolls-Royce's results should help unravel the misconception that the company is too exposed to the fortunes of the airline sector. "Rolls-Royce is not just the world's second largest manufacturer of commercial aero engines," he said. "It is also a major manufacturer of small and large turbine equipment for defence, marine and energy sectors ... These three divisional activities account for over one-half of Rolls-Royce's annual revenue. Profits are very sound in the defence aerospace division, rising fast in marine and we are of the firm belief within a couple more years energy profits will also be racing ahead."

However, Rolls-Royce still faces a number of challenges, including continued raw material inflation and currency problems. It announced a cost-cutting package earlier this year, with more than 2,000 support jobs shed.