Rolls-Royce shares fall 12% on flat profits warning

The engine maker says defence spending cuts will take its toll on profits for 2014.

by Elizabeth Anderson
Last Updated: 22 Apr 2015

After enjoying a decade-long profit growth, Rolls-Royce has warned there will be a ‘pause’ in revenue and profit growth for 2014 as defence cuts hit sales of military aerospace engines.

The British engineering firm, consistently ranked near the top of MT’s annual Most Admired Companies Awards, said sharp cuts in defence spending by the US and European governments would prevent any growth in profits in 2014. The news came as a surprise to investors, and sent shares tumbling 12% by mid-morning, wiping some £3bn off its value.

‘We've defied gravity for a couple of years compared to many other companies and now we're having the impact come together in one year,’ CEO John Rishton said.

But he said that he expects business to be stronger in the second half of 2014, with growth to return in 2015 as the company ramps up production of aero engines. ‘This is a pause, not a change in direction, and growth will resume in 2015,’ Rishton added.

The comments came as Rolls-Royce revealed an annual underlying pre-tax profit of £1.76bn for 2013, up 23% on the year before. Its order book increased 19% to £17.6bn; however profit before tax fell 36%. The London-based company expects a fall of up to 20% from defence sales this year.

That compares to underlying pre-tax profits of £1.4bn in 2012, up 24%, and a revenues rise of 8%.

More than half of Rolls-Royce’s order book now comes from Asia and the Middle East. However, it hasn’t all been plain sailing. In December the UK's Serious Fraud Office launched an investigation over allegations of bribery and corruption by the company in relation to possible wrongdoing in China, Indonesia and other markets. On Wednesday two men, not Rolls-Royce employees, were arrested as part of the investigation.

Rolls-Royce has enjoyed strong profits and revenue growth over the last decade thanks to soaring demand for more fuel-efficient engines for planes made by Europe's Airbus and US firm Boeing.

However, the firm came under scrutiny last year after it was revealed it didn’t pay any corporation tax in 2012, despite receiving development tax credits and reliefs from the government worth around £11m. Rolls-Royce said that because 85% of its profits are generated overseas (where it paid £218m in tax), the zero figure in the UK was justified.

The company’s shares have jumped from 289p five years ago to around £10.70 today.

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