Rolls-Royce’s organizational malaise suggests the company may be headed for a “near-death experience,” one analyst says. that could see its shares drop 80 per cent from the peak, Agency Partners analyst Nick CunninghamARND WIEGMANN/Reuters
Rolls-Royce Holdings PLC chief executive officer Warren East revealed the full extent of the earnings meltdown facing Britain's leading manufacturing company and said he's uncovered issues with its organization and management that run deeper than was apparent when he took over in July.
Pretax profit will take a £650 million ($1.3-billion) hit from a slide in demand that Rolls is unable to mitigate because of an inflexible approach to costs, Mr. East said Thursday, ordering a review of dividend payments. The announcement extended a series of profit warnings that have battered the company for two years, sending the stock down the most since 2000.
Mr. East's comments come as a further blow to a business that was regarded as Britain's biggest industrial success story, recovering from bankruptcy to become a poster child of Margaret Thatcher's privatization drive and take on the likes of General Electric Co. The CEO said he sees no quick fix, effectively writing off a recovery before 2017, when the results of a restructuring plan begin filtering through.
"These sorts of transitions are often painful, and this one has actually proved to be more painful than anyone expected," he told reporters. "The fixed costs in this business are simply too high, so that small, relatively modest changes in the top line driven by market conditions just make too big an impact."
The revelations regarding Rolls-Royce's organizational malaise suggests the company may be headed for a "classic aerospace and defence near-death experience" that could see its shares drop 80 per cent from the peak, Agency Partners analyst Nick Cunningham said.
That came as a shock to investors who had been expecting Mr. East to focus his attention on re-evaluating the London-based company's diversified business portfolio away from power equipment and marine turbines to focus on a record aero-engine backlog.
The meltdown could spill into Britain's political arena as doubts are cast over job security. Rolls employs more than 50,000 workers, many of them in highly skilled roles in economically vulnerable parts of the country. The political reaction was muted with details on Mr. East's restructuring coming only later this month. The Department for Business, Innovation and Skills had no immediate comment when contacted.
Rolls-Royce shares fell 20 per cent, the biggest drop since Aug. 24, 2000, to close at 536.5 pence in London. The stock has slumped 37 per cent this year following a decline of 32 per cent in 2014, reducing the company's market value to £9.86-billion.
"The company's prior push to reduce earnings volatility and surprises looks to have been completely unwound," Keith Bowman, an analyst at Hargreaves Lansdown Stockbrokers, said in a note. "Rebuilding confidence in the company's outlook is now paramount for the relatively new chief executive."
The earnings revision comes after Mr. East attempted on July 6 – his second day as CEO – to make a clean break from predecessor John Rishton, who clashed with investors over earnings transparency and key strategy decisions. The newcomer cut full-year forecasts, halted a share buyback and said 2016 numbers would be hurt by slowing sales of engines for smaller aircraft and ships that serve the beleaguered offshore oil industry.