Stocks in Focus: Rolls-Royce

21/09/2016

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This week Oliver Phillips of NW Brown looks at Rolls-Royce, the British engineering giant focused predominantly on the production of aircraft and marine engines.

 

The company has recently announced that it is cutting more than 200 management jobs as part of a larger restructuring programme announced back in November 2015.

Rolls-Royce has been struggling with falling engine sales and service revenues over the past couple of years. The prolonged slump in oil and natural gas markets also hit the company’s power and marine businesses. These consequently led to several profit warnings over the past two years and forced management to cut dividends for the first time since 1992.

In order to tackle these issues, the company’s chief executive Warren East established that the organisation has been suffering from an overly complex structure, which made it slow to respond to changes. Mr East, who took charge of the company last year, then moved to remove this complexity by slimming processes and cutting costs through the reduction in the number of divisions from nine to five. With this new round of job cuts, Rolls-Royce will have trimmed more than 600 senior positions to date as it tackles its bloated middle management level.

Rolls-Royce has a large order book from the growing Civil Aviation market and there are now pressures on production with plans to double the output of aircraft engines by the end of the decade in order to meet demand from Boeing and Airbus. This should provide the company with good long-term visibility of earnings. Nevertheless, the results of Mr East’s efforts are still uncertain as his latest announcement may suggest that his measures have not produced the impact he was seeking after indicating in May that the process of thinning management was over. He is expected to update investors on the progress of his restructuring plan in November.

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