Rolls-Royce and BAE set to announce profit falls

Two of Britain's blue-chip engineering companies, Rolls-Royce and BAE Systems, are expected to report lower earnings at their half-year results

BAE Systems' Hawk trainer is powered by a Rolls-Royce engine

Britain's two premier engineering businesses, Rolls-Royce and BAE Systems, are set to report declining profits when they both post half-year results.

Jet engine manufacturer Rolls is expected to continue its run of bad news by announcing underlying pre-tax profits have fallen by a third to between £390m and £430m. Revenue is expected to come in at £6.4bn for the six months, down £400m on a year ago.

At the same time defence giant BAE is also forecast to deliver downbeat numbers, with underlying earnings retreating 5pc to around £750m, though sales are expected to rise by about £300m to £7.9m.

Rolls’ results, to be reported on Thursday, will be the first scheduled appointment with the City for new chief executive Warren East. On July 6, the first day of his first full week at the company’s helm, the former ARM Holdings chief executive made an unscheduled announcement to warn that Rolls’ annual profits would be lower than previously guided, with problems going into the next year.

The profit downgrade was related to the Derby-based company’s troubled marine business that supplies engines to the offshore energy industry which has slashed capital expenditure in the face of the oil price crash, and fewer business jets needing engines.

Rolls-Royce has faced falling demand for its Trent 700 engine

Rolls is also facing heavy pricing pressure on its Trent 700 engine sales as Airbus is reducing production of the A330, which uses the engine, Mr East said. Accounting changes are expected to mask the true impact of the Trent 700 problems until the 2016 results.

On Thursday, Mr East is expected to shed more light on the challenges the company faces, and reveal the progress of an ongoing review of the company’s operations. “Don’t expect Warren to reveal a grand plan for Rolls at the results,” said a source close to the company. “He’s only been in the job a few weeks and is still learning the business.”

“We are still striving to fully understand the underlying reasons [for the downgrades],” noted Berenberg analysts in a research note, adding that “the Trent 700 related downgrades are most perplexing” as Airbus announced the new version of the A330 a year ago.

Over at BAE, the firm is expected to post lower profits for the six months to June, although this is largely the result of an unusually strong performance in the same period last year – when the company had strong deliveries of Typhoon fighters – with organic growth in other divisions not enough to offset this.

BAE’s UK platforms and services business, which makes aircraft, ships and other armaments, is expected to report sales up by about £400m to about £3.2bn over the half, with other divisions broadly flat or up.

The company remains under pressure to win orders for the Eurofighter Typhoon. The market will be looking to chief executive Ian King for signs of progress on selling the fighter abroad, with production set to end in 2018 unless more buyers are found.

Mr King will also likely face questions about his future after the company said it had taken on a headhunter to find a replacement for him. BAE said this was a normal part of succession planning and that it was merely “scanning the horizon”.

BAE has built is building helipcopter landing ships for the Australian Navy

Deutsche Bank analyst Ben Fidler believes BAE faces a number of long-term risks, including the prospect of a hit on its Australian unit, foreign exchange rates weighing and the company “effectively stalling” its share buyback.

Mr Fidler said he had a “growing concern that restructuring of the Australian shipyards may well be required”, and put a £25m price-tag on such a move. Since winning the order to build two landing ships for the Australian Navy, the company has yet to secure further contracts, meaning redundancies could be required.