Rolls-Royce's shares plunge on forecast for flat 2014 results - UPDATE

16th Feb 2014 14:19

- FY 2013 revenue and profit rise - Dividend raised 13 per cent - FY 2014 revenue and profit expected to be flat Rolls-Royce's shares tumbled after saying it expects flat 2014 revenue and profit due to cuts in government defence spending. The world's second-largest maker of aircraft engines revealed an estimated 15-20% drop in defence revenue would hinder results this year as it reported its full-year 2013 earnings. In the fiscal year 2013 the group achieved a 23% rise in underlying pre-tax profit to £1.7bn as underlying revenue jumped 27% to £15.5bn. The company's order book rose 19% to £71.6bn, driven by orders in its Civil Aerospace, Marine, Energy and Power Systems businesses. It offset a decline in Defence Aerospace. The annual results for the first time accounted for the acquisition of German engine manufacturer Tognum, which was integrated into the Power Systems arm. The group raised its dividend by 13% to 22p per share. Rolls-Royce delivered a cash inflow of £359m after payments to shareholders, prior to acquisitions, disposals and foreign exchange. Free cash flow guidance lower than expected by some Free cash flow (FCF), defined as operating cash after pensions and taxes, but before payments to shareholders, acquisitions & disposals, and foreign exchange was £781m (£669m excluding Tognum) and was expected to be at a similar level in 2014, whereas broker Jefferies had penciled in £891m, or 12.5% more. FCF is arguably one of the most important metrics for analysts. Chief Executive John Rishton said the company had reduced costs during the period but there was "more to do". The firm reduced indirect headcount by 11% with further savings identified for 2014. Rolls-Royce expects to see the benefits of cost cuts in the second half of 2014. Long-term story still good For analysts at Jefferies their failure to correctly anticipate currency headwinds and the size of the restructuring bill may have been two of the reasons why their estimates erred. They also admitted they may have jumped the gun when anticipating an announcement on a restructuring of the outfit's energy division. The broker's forecasts for the marine and civil aerospace divisions also seem to have erred.Given that there are so many 'moving parts', they explained to clients that "it will take the cold light of a few dawns for us to fathom out the detail of RR's FY13 results and guidance for FY14."The broker also held out the possibility that investors might have been trying to 'warn' the company against embarking on wasteful acquisitions.In an immediate reaction, Investec had this to say "The longer-term story remains good but the statement and guidance today is a major disappointment and will set back the share price for some time, in our view." Shares fell 11.65% to 1,069p at 09:38 on Thursday. RD/AB