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Does Rolls-Royce need shaking up?

Does Rolls-Royce (RR.) need shaking up? Or more to the point perhaps, will they be following the disclosure that activist fund manager ValueAct has taken a 5% stake in the company, although their agenda is as yet unclear.

On the 30th July Rolls-Royce issued their half-year results. Results were disappointing as expected. The order book was up, but underlying revenue was down and underlying profit before tax down by 32%. This is basically the same story as was evident at the full year results in February -see for our comments on those. In essence aero engine orders up, but they seem unable to deliver them. Power Systems and Marine divisions were again weak – many people see these as an unprofitable diversification that should be sold. In the meantime the company makes positive noises about the future such as “The continued growth in our order book demonstrates the long-term demand for our innovative products and services, and underpins my confidence in the fundamental strength of our business” to quote the new CEO. But there is also talk about “accounting headwinds” and “market headwinds”.

As usual Rolls-Royce gives comprehensive guidance about future results. Free cash flow in FY 2015 is one concern which might be negative.

Perhaps it is too early to criticise the new CEO, Warren East, for failing to tackle the problems vigorously, but one does get the impression that this company is so large that it is like a super-tanker – difficult to change direction quickly enough.

What do you think? And what could or should be done?

Roger Lawson

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