Rolls-Royce
Gallows humour has it that the first-ever cut in Rolls-Royce’s creditworthiness to junk status is only because rating agencies were not around in the 1970s, when the company collapsed and was saved by nationalisation. Then again, so the jokers say, if S&P, Moody’s and Fitch had been opining on Rolls in 1971, they probably would have missed its implosion and would have cut their ratings only once the aircraft engine maker had actually gone bust (Robert Lea writes).
That S&P is warning now that Rolls is a risky entity to do business with (something that the stock market already knew) merely indicates the seriousness of Rolls’ financial crisis. If the company had been trying to hide it (which it hasn’t), it wouldn’t have allowed Warren East, its chief executive, last month to describe the present situation as “our darkest hour” since the 1970s.
Rolls-Royce ended last year as a company with £15 billion-plus of annual turnover. More than half of its business is in commercial aerospace, making aircraft engines mainly for Airbus and Boeing. But what have been its strengths in the past now look like weaknesses. Half of its civil aerospace income is based on airlines’ flying time — and most of the world’s fleet of jetliners has been grounded. Meanwhile, making Trent 1000 engines for the Boeing 787 Dreamliner has been a financial disaster, with fan failures, repairs and the grounding of aircraft in service costing Rolls a total of £2.4 billion. It is also the exclusive engine provider for Airbus’s rival aircraft, the A350, but Rolls now looks horribly concentrated on one engine, the Trent XWB, for an aircraft with a big backlog but slowing deliveries.
In the long term, Rolls needs to reduce its over-dependence on a couple of civil aero engine programmes. In defence, it makes engines for Royal Navy submarines and warships and RAF jets. It needs to land the big contracts with the American military that are up for grabs, the “re-engining” of B52 bombers and the replacing of Black Hawk helicopters. Meanwhile, in power systems, it needs to prove that it is the future of hybrid and electric train propulsion. And it needs the British government to get behind its mini-nuclear power station technology, the small modular reactor.
Mr East has been emphasising that Rolls’ predicament is dependent on the depth of the Covid-19 crisis and how long it lasts. The company went into the pandemic with cash and available overdrafts — liquidity — of £6.7 billion. Jefferies, its house broker, reckons it will have burnt through up to £3.5 billion in the first half of 2020. All bets are off on what the full-year impact will be. The 9,000 job cuts that Rolls has signalled will save money in the long term, but will cost a lot in redundancy packages in the months to come.
How long the crisis continues is the known unknown. No one is expecting a bounce in civil aerospace in 2021 and such a recovery could be as late as 2025, elongated or truncated by second spikes in the virus or co-ordinated government relaxations of travel restrictions.
Yet one thing is certain. It is not so much that Rolls is too big to fail as it is, at least as far as the government is concerned, too important to fail. It is, on the one hand, a crucial national security asset and, on the other, at the centre of political efforts to “green” the wider industrial economy.
On a five-year view, Rolls’ bombed-out shares may look cheap — they were 13¾p, or 4.8 per cent, up today at 300½p — but for now the danger is that the stock becomes the plaything of the hedge funds and at the moment they are selling or shorting. It remains to be seen who has the last laugh.
ADVICE Avoid
WHY Rolls-Royce’s future structure is uncertain and civil aerospace recovery will be slow
Novacyt
Life is something of a two-way street at Novacyt at the moment. Sales, orders and regulatory approvals continue to move generally in one direction — pleasingly higher — but the share price, once a blistering pacesetter, is now going the other way (alex Ralph writes).
In a trading update yesterday, the Aim-listed company said that its Primerdesign Covid-19 diagnostic test had received £120 million of sales and confirmed orders by the start of this month and was being sold in more than 130 countries. In France, though, a home market for the Anglo-French business, the independent scientific advisory body to the government has not approved the test for reimbursement, despite clinical approval from the Pasteur Institute in April.
The share price movement that followed suggested perhaps a little disappointment and certainly a degree of continued profit-taking by investors. Between the end of last year and April 14 this year, Novacyt’s shares rose from 13p to 491p as retail punters piled into a company that had quickly captured a dominant position selling diagnostic tests. Since then, however, the shares have fallen back and were down a further 29p, or 8.7 per cent, today at 306p.
The challenge for management, therefore, is to increase confidence in the business’s potential once the Covid-19 pandemic is over. Last month Graham Mullis, Novacyt’s chief executive, said that demand would continue through to the end of the year and possibly “well into” 2021, as other countries suffered waves of outbreaks.
The virus certainly has helped to raise Novacyt’s profile. Government contracts and partnerships with Astrazeneca and Glaxosmithkline, Britain’s big drugs makers, have burnished its reputation and increased its global customer base. Last month Mr Mullis, 57, hinted that the company had attracted interest from strategic investors, although now was not the time to engage.
Outside investment potentially could transform and diversify Novacyt. For now, with the shares already having risen rapidly this year and with no dividends to speak of, investors are best placed to enjoy the rollercoaster ride from the sidelines.
ADVICE Avoid
WHY Still to convince on its potential beyond Covid-19
