Jet engine maker Rolls-Royce finds lift with fraud inquiry settlement

Shares of the British maker of powerplants for jetliners, submarines and marine vessels surge on news that it has settled a long-running investigation into alleged fraud.

Rolls-Royce engines are used on superjumbos including the Boeing 787 Dreamliner. Anthony Bolante / Reuters

Shares in Rolls-Royce jumped 6 per cent on Tuesday after the British maker of engines for planes and ships settled a long-running bribery probe and said 2016 profit would beat expectations.

The news of the profit upgrade came as a boost to the firm after an eighteen month period of cost-cutting and restructuring led by the chief executive Warren East, who was brought in to stabilise the company in mid-2015 after a series of profit warnings.

Analysts said that Rolls’s settlement of the bribery investigation with British, US and Brazilian authorities also helped to remove a cloud hanging over the company since 2013, even though the penalty was bigger than expected.

It will pay £671 million (Dh2.99 billion) to settle the investigations.

Shares in Rolls jumped by 6.1 per cent in early trading.

The Jefferies analyst Sandy Morris said that the impact of the charge taken to settle the bribery claims was mitigated by the authorities agreeing to spread the payment over five years, meaning the financial impact on the company was “negative but benign”.

“This is by no means a great moment in Rolls-Royce’s history but in terms of a healing process, getting the SFO [Serious Fraud Office] settled and having trading particularly on cash flow improving, well maybe, just maybe, Rolls is on the mend,” he said.

Rolls said it had finished the year strongly meaning that profit and cash flow would be ahead of expectations.

Analyst forecasts had been for Rolls’s 2016 pretax profit to come in at £686m, half what it made in the previous year. The company is due to report 2016 results on February 14.

Rolls said the deals agreed with the three authorities would involve the group paying about £293m in the first year.

The company is due to seek final judicial approval for its agreement with Britain’s SFO later on Tuesday.

Analysts are positive on the turnaround plan Mr East has led at the company, which has included shedding hundreds of managers, speeding up decision-making.

“I think he’s doing a really good job. He’s doing all the right things,” said the Agency Partners analyst Nick Cunningham.

Mr East himself, 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 plane engines by 2019 to meet orders while avoiding cost overruns and technical problems.

Over the past 12 months, shares in Rolls have outperformed Britain’s blue-chip index, rising 33 per cent, but have declined 8 per cent since November when the company set out what new accounting procedures due in 2018 would mean for its profits.

* Reuters

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