Rolls-Royce’s shares soar as it unveils a £1bn buy back
A SURPRISE move by Rolls-Royce to buy back shares worth £1bn instead of making any major acquisitions prompted a surge in the engineer’s share price, writes James Salmon.
The firm said it was on track to return to earnings growth next year, reassuring investors alarmed by a cut in profit forecasts in February and an engine order cancellation this month.
The buy back, equivalent to around 5pc of the UK powerhouse’s £19bn market value, will be funded in part by the £785m sale of its gas turbine unite to Germany’s Siemens, agreed in May. It will be subject to the completion of the deal, which is expected to happen at the end of the year. Shares climbed 82p, or 8pc, to 1092p
Chief executive John Rishton (pictured) said: ‘As no material acquisitions are planned, and reflecting the strength of our balance sheet, we will return the proceeds of the energy sale to our shareholders’.
Analysts welcomed the buy back as a ‘positive surprise’ as investors had become increasingly concerned that Rolls was about to embark on a large takeover bid in the pursuit of growth.
It had last year considered a bid for Finnish ship and power plant engine maker Wartsila to strengthen its marine engine business, and analysts had said that the deal could re-emerge.
In a further move to reassure investors, Rolls said it would cut spending to 4pc of revenue over the next three to five years from 4.9pc at the end of 2013.
Edward Stacey, an analyst at Espirito Santo, said: ‘The buy back is good news because it shows the company is committing itself to very tight capital discipline, prioritising rewarding shareholders ahead of expanding the footprint.’
Analyst Rami Myerson from Investec described it as a ‘positive surprise’.
Analysts expect Rolls-Royce to post flat pre-tax profit of £1.7bn for 2014. Before February’s warning, they had expected pre-tax profit growth of 8pc this year. It has been a testing time for Rolls-Royce, which is being investigated for bribery and corruption allegations in China and Indonesia.