Shares in Rolls-Royce Holdings PLC (LON:RR.) had slumped by over 4% at lunchtime, topping the FTSE 100 fallers list, after the engines maker posted a record loss in 2016 impacted by hefty charges for new reporting standards and financial penalties for bribery scandals.
However, despite the big falls, some analysts were questioning whether the engineering giant could have ‘turned a corner', with improvements seen in 2017 as chief executive Warren East’s fundamental restructuring efforts draw to a close.
In today’s results statement, former ARM Holdings boss East - who was brought in to restructure the group in 2015 - said "we have delivered major changes to our management and processes and, while we have made good progress in our cost cutting and efficiency programmes, more needs to be done to ensure we drive sustainable margin improvements within the business.”
READ: Rolls-Royce slumps to hefty 2016 loss …
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Chris Beauchamp, chief market analyst at IG, said: “While Rolls Royce threw everything into their results to try and get all the bad news out of the way, the yet-to-arrive turnaround plan is causing shareholders to throw their toys out of the pram, with the shares down over 4%.
“The question now is, ‘does Warren East have the necessary steel to radically transform Rolls-Royce to make it fit for the next 20 years?’"
Shares in the company have risen by nearly 50% from the five-year-lows they hit in early February 2016, however, and are still up 5% in the year-to-date.
Modest improvements …
Rolls-Royce, which makes engines for both civil and military jets and for marine customers, said it expected "modest performance improvements" this year and would aim to keep its free cash flow at a similar level to 2016.
Julie Palmer, partner at insolvency consultancy Begbies Traynor, said: “2016 was a torrid year for the Group, which saw it fined £671 million by the Serious Fraud Office to settle bribery and corruption charges, weak demand for its previously popular Trent 700 engine and a major write down in the value of its investments in response to Brexit-related sterling weakness.
“But Chief Executive Warren East will be hoping to draw a line under the events of last year as he works to drive through further cost cutting and efficiency measures to boost margins across the Group and regain the trust of its increasingly disgruntled investor base.”
Dividend pain …
Rolls-Royce halved its dividend in 2015 to help shore up its finances, the first cut in the payout for 24 years.
It kept the dividend at the same level last year, a move it said would allow it to maintain a degree of flexibility in its balance sheet.
On the dividend decision, analyst Andy Chambers at Edison Investment Research said "this might be considered a little conservative following the pain shareholders have suffered in the last few years".
But he added that, ignoring the headline loss, the underlying performance of Rolls-Royce was ahead of both his and market expectations.
Civil market …
Analysts at Jefferies International, meanwhile, were encouraged that civil large engine aftermarket revenues adjusted for contract accounting grew by 2% organically over the year after the 6% organic decline in the first half.
They said: "Growth in these revenues is the key as we expect cash receipts from flight-hour payments to grow much faster than spend on overhauls.”
The analysts added: "The turn may be slow in financial terms, but operationally and fundamentally it is faster, in our view.”
Jefferies has a ‘buy’ rating and 900p price target on Rolls-Royce shares.