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

13th Feb 2014 07:09

- FY 2013 revenue and profit rise- Dividend raised 13 per cent- FY 2014 revenue and profit expected to be flatRolls-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 someFree 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 goodJefferies International said: "FY14 PBT is guided to be similar to that for FY13 implying a near 7% reduction to our forecast. "The main culprit is Defence where profits are guided to fall 15%-20% versus our forecast of a 6% fall. Restructuring costs will rise too. However, 2H13 cash flow looks reassuring, the TotalCare net asset rose only slightly in 2H13 and FY14 cash flow guidance also looks OK. By 2017/18, maybe sooner, we may finish up in much the same place in terms of profit and cash."The broker recommended a 'buy' rating and a target price of 1,400p.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