Jet engine fix to blow £1bn hole in Rolls’ hopes for turnaround
RELIABILITY problems with Rollsroyce’s flagship jet engine are expected to cause more turbulence for its turnaround this week.
The engineering giant has already warned that the total bill for fixing Trent 1000 engines, which power Boeing 787 Dreamliners, is likely to exceed £1bn.
The engines have required a massive programme of emergency inspections and maintenance after cracks in fan blades were detected.
It means Rolls’ half-year results on Thursday are expected to show negative free cash flow of £400m. The figure would represent a deterioration on the first half of last year when it spent £339m more than it was making.
The continuing costs are a blow to Warren East, the chief executive, who has appealed to investors to judge Rolls on its cash flow. He says the way the engineer sells engines at a loss in order to make profits later on long-term servicing deals means traditional financial measures do not give a true picture of how it is performing.
The Trent 1000 failures mean hitting a full-year target of £500m positive free cash flow is more challenging.
Mr East is stripping out other costs in a bid to soften the impact. In June, he revealed a “fundamental” restructuring which will cut 4,600 jobs, or about a tenth of staff, over the next two years. All non-essential spending including travel and IT upgrades has been curtailed. Rolls is also looking for cheaper offices for its London headquarters.
City doubts over Mr East’s ability to hit his medium-term target of £1bn positive cash flow by 2020 have been fuelled by the company’s inability to provide forecasts for next year.
Analysts at Exane BNP Paribas are predicting first-half revenue of about £3.1bn. That would be £500m down on last year and deliver a small underlying pre-tax loss, compared with a £287m profit. But Sandy Morris, analyst at Jefferies, said: “Despite reporting numbers that are dreadful on traditional measures, Rolls is somehow a £10 a share company, when by normal valuations it should be £2. It just shows the belief investors have in its future.”
Britain’s other engineering giant, defence company BAE Systems, will also be reporting interim numbers this week. It is reporting under new accounting standards and is expected to post revenues of about £8.6bn, down £1bn, with pre-tax profit falling about £100m to around £700m.
Some analysts expect it to announce that its Applied Intelligence cyber division has failed to break even, despite it taking a £384m impairment writedown at the annual results.
However, the key area of focus will be the order pipeline after BAE won a £20bn contract for warships for Australia, a deal with the US to supply new amphibious vehicles for the marines, and the sale of more of its Typhoon fighter jets.