It’s been a good while since Rolls-Royce was purring along smoothly. The FTSE 100 aerospace and defence engineer is in the thick of an overhaul and reinvention under Warren East, its chief executive.
Persistent technical problems with its Trent 1000 engine and other write-offs and costs sent the group plunging to a loss last year and have taken the wind out of a nascent recovery in the shares, off 9¾p, or 1 per cent, at 895¼p yesterday and down 9 per cent since this year’s peak in February.
Rolls-Royce traces its origins back to 1884 as an electrical and mechanical business set up by Henry Royce, who joined forces in 1904 with Charles Rolls, whose company made luxury cars. Based in Derby but long out of the carmaking game, the group specialises in building engines for the civil, defence and maritime sectors and produces instruments and monitoring systems for the nuclear industry. Listed since 1987, it employs more than 50,000 staff worldwide, boasts Boeing and Airbus among its biggest customers and has a market value of just under £17.2 billion.
The group’s problems go back way more than five years, but they burst into investors’ consciousness between 2013 and 2015, when Rolls-Royce issued no fewer than five profit warnings over twenty months, three of them under John Rishton, the previous chief executive. Not only was it struggling with weak markets for business and regional aircraft, but the oil and gas industries to which it was a big supplier of engines and services were also mired in a downturn. The group was experiencing serious hiccups transitioning from its older engine models, such as the Trent 700 to the new Trent 1000 version. And on top of all that, it had become overly complex and inefficient, bloated with layers of middle management.
It has fallen to Mr East, signed up in 2015, to fix Rolls-Royce’s problems, which included two further earnings alerts and then two years later a £671 million settlement with British and American authorities relating to allegations of bribery and corruption dating back three decades.
The company’s boss has restructured the marine business, sold unwanted assets, put in place a cost-cutting programme with a cull of 4,600 back-office and middle management jobs, and set a target of generating at least £1 billion of free cashflow by the end of next year.
All the while, he and his company have been haunted by problems with the Trent 1000 — specifically, faster-than-expected corrosion of some of its turbine blades— and a £790 million loss against the engines was part of what propelled Rolls-Royce into its multibillion-pound loss for last year. The cost of compensation and fixes will have totalled £1.5 billion by 2022.
There has been another setback. The company’s latest engine, the Ultrafan, will not be ready until the second half of the 2020s, which has forced Rolls to pull out of the competition to be the engine maker for Boeing’s new medium-sized aircraft, due to come into service in 2025.
Underneath all the red ink in the results, the group is beating its targets, more than doubling free cashflow to £641 million last year and increasing its underlying core revenues by 10 per cent to more than £14.3 billion. Underlying operating profits were 71 per cent higher at £633 million. It hopes to get that to £700 million this year.
Even though it has some way to go, Rolls-Royce shares carry a high rating, trading at 38.7 times UBS’s forecast earnings for a prospective yield of only 1.6 per cent. Given the risks that still lie in Mr East’s plan, they are probably best avoided.
Advice Avoid
Why For a loss-making company that has much left to prove, shares seem expensive
Pantheon International
In a world where companies are increasingly choosing to shun listings on public markets in favour of a quieter life under private ownership, it is likely that there will be more vehicles like Pantheon International.
An investment trust created in 1987, it offers investors exposure to pools of private equity funds and is the oldest listed venture of its kind. The thesis is that investing in unquoted securities offers returns that tend to outpace those of public markets over the longer term. The trust is managed by Pantheon, the private equity investor, and its aim is to generate solid growth through a portfolio diversified by geography and investment type. As well as investing in mainly new funds, it also takes direct stakes in unlisted companies, but always in partnership with others.
Like its peer, Harbourvest Global, Pantheon International pays no dividend, so shareholders are reliant on their capital appreciating in value over time, although the 1,110 per cent increase in the share price over the past ten years suggests that its track record here is pretty strong.
There is some serious calibre in the players in which Pantheon has chosen to invest. Its biggest exposure is to Providence Equity, a media buyout specialist, but it also has invested in funds managed by Texas Pacific, Warburg Pincus and Hellman & Friedman. Unsurprisingly, more than half of its interests are in the United States.
Pantheon’s performance has been none too shoddy. Over the six months to the end of November, it improved its net asset value per share by 10.7 per cent to £26.74¼, helped by £134 million it received from company sales or listings. It has beaten its benchmark, the MSCI World Total Return index, over one, three and five-year time frames, but lags behind it over a ten-year comparison.
Although its share price has been improving, the stock trades at a very high discount — about 23 per cent — to the net value of its assets, though Harbourvest’s is similar. The discount makes the shares, down 10p at £21.20 yesterday, cheap but acts as a hindrance if the gap does not narrow by the time an investor wants out. This is a solid, long-term play.
Advice Buy long term
Why Has clearly shown ability to achieve returns over time
