Market Report: Rolls-Royce comes back down to earth

Rolls-Royce enjoyed a day of flying high on Thursday after the aircraft engine maker reported first-half results ahead of expectations. But the shares went into a nosedive yesterday, following a downgrade from Deutsche Bank.

The analyst Benjamin Fidler is concerned about sky-high costs and cashflow that even Rolls-Royce's chief executive, John Rishton, admitted was "unacceptable" this week.

Mr Fidler said yesterday that although first-half sales and operating profits were "modestly" ahead of forecasts, this was more than explained by "one-off benefits". Excluding these, he explained, civil aerospace costs rose and cashflow was "poor". Mr Fidler said that while Deutsche sees potential for improvement in the company's margins and cashflow conversion, he believes the market "overestimates the pace at which these can be delivered in what is a complex business".

Mr Rishton has vowed to clamp down on the engine maker's costs and said on Thursday: "It is clear that we have a lot more to do on cost and cash. Fortunately we have significant opportunities to do both, but this will take time and firm resolve to deliver."

Shares in Rolls-Royce tanked by 40p to 1,200p, dragging it towards the bottom of the FTSE 100.

Royal Bank of Scotland was also down, by 10.1p to 328p, on a subdued day of trading which saw the FTSE 100 slip by 33.16 points to 6,554.79.

Top dog yesterday was Pearson, owner of the Financial Times, after investors warmed to the news that it is exploring the possible sale of Merger Market, a provider of information on deal activity that has annual revenues of £100m. While Pearson said it had no plans to sell the FT, it explained that Merger Market no longer fitted its core strategy of focusing on education and learning.

Shares in Pearson rose by 77p to 1,329p – their highest for 12 years. The group was also boosted by first-half sales ahead of expectations, with underlying revenue up by 2 per cent to £2.8bn. But £37m in restructuring charges related to the merger of its Penguin book brand with Random House dragged it to a £4m pre-tax loss.

Another riser was the oil and gas explorer BG Group, up by 5p to 1,190p even as it flagged up concerns about Egypt's military coup while reporting a 3 per cent fall in second-quarter net profit to $986m (£643m).

BG is owed $1.3bn by Egypt, where it carried out about a fifth of its production. "Events in Egypt remain a primary concern," said the chief executive, Chris Finlayson.

Vedanta also had a good day at the coalface after the mining group received approval from the High Court of Madras for its proposed restructuring plan. Its shares rose by 13p to 1,180p. Christopher LaFemina at Jefferies, the investment bank, believes Vedanta is now better positioned for the long term. He said: "The restructuring should also benefit the capital structure of the company, as the group debt will be more in line with cash-generating assets and interest expense will decline."

However, it was a day to forget for the broadcaster BSkyB, which revealed it would invest about £70m this financial year in new on-demand programming services and pay-TV technology. This took the City by surprise and helped to push shares in the company, whose chief executive is Jeremy Darroch, down by 28p to 822p. This was despite BSkyB delivering record annual operating profits of £1.33bn, on increased revenue of £7.23bn.

Roddy Davidson, an analyst at Westhouse, the stock broker, said that the pay-TV giant's results provided a clear reminder of its underlying strengths, including an "unrivalled content proposition, loyal subscriber base, very strong cashflow and proven marketing skills".

He added: "We believe these characteristics will stand it in good stead when facing down growing competition for new customers [particularly from BT] and, allied to the opportunity created by bundled services and new products, will underpin attractive earnings per share and dividend progress."

Finally, Premier Foods, the maker of Hovis bread, Mr Kipling cakes and Bisto gravy, ended the week on a high, following half-year results that showed a sharp jump in trading profit on Wednesday. The company, which has net debts of £890m, rose by 3.25p to 90p, although its stock has fallen by more than 20 per cent so far this year.

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