Shares in Rolls-Royce were battered yesterday as the engineering giant issued its second profit warning of the year, blaming trade sanctions against Russia as well as global economic gloom.
The chief executive John Rishton warned of a second straight year of no growth, three months after he insisted that 2015 would bring revenue and profit increases.
Admitting that the future looked “bumpier than I had expected”, he shocked the market by admitting that deteriorating economic conditions and a tit-for-tat trade war between the EU and Russia over the Ukraine crisis had hit its nuclear and energy and power systems businesses. In response, the shares plunged nearly 12 per cent to 832p, their lowest level since the end of 2012 and marking a drop of a third this year.
Rolls shocked the markets in February with its first profit warning in a decade and that sparked a share sell-off which wiped more than £3bn from its value in a day.
Mr Rishton warned at the time that there would be no growth in sales or profits this year, largely because of government cuts in defence spending.
The world’s second-biggest aircraft engine maker yesterday admitted that revenue would fall by between 3.5 per cent and 4 per cent this year, when previous guidance was that it would be flat at £15.5bn. This excludes a £500m hit expected from currency movements. In addition Rolls – which is still engulfed in a Serious Fraud Office investigation into claims of possible bribery involving intermediaries in overseas markets, including China and Indonesia – said that profit was likely to fall by up to 3 per cent next year.
Mr Rishton apologised to analysts after he reneged on a promise to give revenue guidance to 2018. He argued that the volatility of some of Rolls’ businesses meant that the range would be so large as not to be “helpful”.
“While the short term is clearly challenging, reflecting the economic environment, the prospects for the group remain strong, driven by the growing global requirement for cleaner, better power,” he said.
The company is preparing to make job cuts as part of an accelerated restructuring programme. It pointed to a focus on “cost, including headcount, footprint and sourcing”.
Harry Breach, an analyst at Westhouse, said the news was “disappointing” and Garry White, the chief investment commentator at Charles Stanley, said the “biggest shock” was a cut in guidance on free cashflow – money left after capital expenditure – from £780m to £350m.
Yuri Botiuk, at the law firm Pinsent Masons, said the market reaction highlighted the potential for “unintended consequences” with sanctions.
“Rolls-Royce investors may be surprised that sanctions against Russia are having this kind of impact given that much of its business is focused on Asia and the US. However, what these developments do is highlight the sprawling tentacles of the sanctions and the potential for unintended consequences,” said Mr Botiuk, adding: “As various parties reportedly seek to challenge the sanctions, it will be interesting to see whether Rolls- Royce does likewise.”
The company again pledged that a £1bn share buyback will start once it has completed the sale of its gas turbine and compressor business to Siemens by the end of the year.Reuse content