Rolls sees silver lining to cloud
Engine maker settles investigation into bribery and ends year on a high
London — Shares in Rolls-Royce jumped 6% on Tuesday after the British maker of engines for aircraft and ships settled a long-running bribery probe and said 2016 profit would beat expectations.
Rolls has undergone 18 months of cost-cutting and restructuring under CEO Warren East, who was brought in to stabilise the company in the middle of 2015 after a series of profit warnings.
Rolls-Royce’s settlement of bribery investigations with British, US and Brazilian authorities helps to remove a cloud that has hung over the company since 2013, even though the penalty was bigger than analysts had expected.
The company said on Monday that it would pay £671m to settle the investigations.
Shares in Rolls had jumped 6.1% to 706p by 9.51am in London, hitting their highest level for two months.
News of the bigger-than-expected settlement was "negative but benign" as the authorities had allowed Rolls to spread payments over five years, said Jefferies analyst Sandy Morris.
"This is by no means a great moment in Rolls-Royce’s history but in terms of a healing process, getting the [Serious Fraud Office matter] settled and having trading, particularly on cash flow improving, well maybe, just maybe, Rolls is on the mend," Morris said.
Rolls said on Monday that it had finished the year strongly, meaning that profit and cash flow would be ahead of expectations. It is due to report 2016 results on February 14, and the consensus forecast is for annual pretax profit to halve to £686m.
East’s self-help measures, which included making savings of up to £200m a year from 2017, plus a positive market backdrop for aircraft engines and a helpful post-Brexit slump in the pound could all have boosted profits, said Morris.
Analysts are positive about the turnaround plan that East has led at the company.
"I think East’s doing a really good job," said Agency Partners analyst Nick Cunningham.
East, however, acknowledges that the company still faces a huge challenge as it tries to execute its restructuring at the same time as almost doubling its output of wide-body aircraft engines by 2019 to meet orders while avoiding cost overruns and technical problems.
Over the past 12 months, shares in Rolls-Royce have outperformed Britain’s blue-chip index, rising 33%, but have declined 8% since November when Rolls set out what new accounting procedures due in 2018 would mean for its profits.
Rolls, which also makes engines for military jets, ships and nuclear-powered submarines, said the settlements agreed to with the three authorities would involve the group paying £293m in the first year.
A UK court was to rule later on Tuesday whether it approved the deferred prosecution agreement in principle between Britain’s Serious Fraud Office and Rolls. That deal covers the company, meaning that individuals can still be prosecuted.
It would be the largest penalty issued by the fraud office, marking a significant victory for an authority set up to deal with the most serious and complex fraud cases. It has had a chequered record in securing convictions in its 28-year history.
The Rolls-Royce provisional deferred prosecution agreement "marks a sea change in the Serious Fraud Office’s war on bribery and corruption, and helps the UK to be seen as more on an equal footing with powerful US enforcement authorities", said Lisa Osofsky from financial crime and risk adviser Exiger.