The main issue is the defence business of the company, according to Garry White, chief investment commentator at Charles Stanley Direct. Revenues are expected to drop 15-20%, mostly due to cuts in government spending.
“Defence spending is facing difficulties, but it will continue,” he said.
However, defence is not the biggest division in the company, and this is where investors see profits ahead. According to White, overall the industry Rolls Royce operates in is in a major growth phase when looking ahead in the next 20-30 years,
“Rolls Royce is the second largest maker of aircraft engines behind General Electric. The gentrification of emerging markets and expectations of rising energy prices will drive demand for fuel efficient engines and upgrade of existing machines,” he added.
Temporary blimp
Earlier this week media more reports surfaced on an investigation by the Serious Fraud Office (SFO) on alleged bribery in the company in Indonesia and China.
The news around the defence sector is ‘disappointing’ and has brought the stock down 20%, Andrew Herberts, deputy head of investment management at Thomas Miller Investment, said.
However, he added that Rolls Royce is looking ‘pretty interesting’ and the cheap stock is looking attractive on a five year view. Particularly Boeing and Airbus in the past decade have made progress in managing their order books, which in turn helps Rolls Royce plan into that more effectively.
“Since its customers are still demanding its engines and turbines, I have confidence in its long term profits and profitability,” Herberts said.
Bribery allegations are most likely to stay on the radar but for how long or to what extent is difficult to quantify.
“We will have to see how robust the anti-bribery processes in Roll Royce are. I don’t see this is as an issue for long-term investment,” Herberts added.
