Rolls remains cautious despite beating forecasts

Jul 31 2009 by Iain Laing, The Journal

ENGINEERING and aerospace giant Rolls-Royce has reported a forecast-beating 9% rise in first-half profits but warned the economic downturn would continue to affect its markets.

The company, which has 400 workers at its Sunderland plant and 200 in Newcastle, reported group underlying profits increased to £445m in the first six months of the year and the firm reaffirmed its full-year guidance, with profits expected to be similar to last year. Analysts had expected a pre-tax profit of £411m for the period.

But Rolls warned its civil aerospace arm would continue to suffer amid a decline in travel and air freight in the global economic downturn. It said it expects underlying profits to be lower across the year in this division, compared to 2008.

Airlines have suffered because of last year’s oil price rises and lower demand and Rolls-Royce said delays on the Airbus A380 and Boeing 787 widebody programmes had also added to uncertainty.

But Rolls said the delays had generated stronger demand for existing widebody products, where it has a strong position. The order book for the firm’s aerospace arm was up to £46.7bn by the end of the period, from £43.5bn.

Rolls said it had seen a 21% increase in revenues from new engine deliveries compared to the first half of 2008.

The firm said across the year it expects engine deliveries to fall, with stable service revenues.

Orders across its divisions grew £2bn to a record £57.5bn, with revenues up 27% to £5.14bn helped by the weakness of the pound.

“The group expects that its global markets will continue to be affected by reducing demand and the impact of financing constraints,” Rolls said.

“However, underlying revenues will continue to grow and underlying profits for the year are expected to be broadly similar to those achieved in 2008.”

This week it was announced that the company will receive £45m in Government assistance towards a £300m programme to build four new manufacturing sites – including an additional facility at its plant in Barnoldswick, Lancashire – for the production of discs, military fan blades and civil nuclear components among other things. It is considering building a new factory with Sunderland a possible site.

Keith Bowman, equity analyst at Hargreaves Lansdown stockbrokers, said: “Rolls-Royce continues to provide a shining light in the UK manufacturing sector.

“In the wake of group plans to invest over £300m in new UK factory facilities, the company has issued consensus beating results.”

He said the firm’s experience in navigating the airline industry was paying off, with increased service revenues helping to offset “unpredictable engine sales“.

Mr Bowman added: “News that the group expects to meet current full year profit estimates provides further justification of management strategy.

“Nonetheless, Rolls remains understandably cautious, with the outlook for the world economy still in the balance.”