Yahoo Finance Rolls-Royce shares tank wiping $2bn off its value
Shares in Rolls-Royce (RR.L) crashed over 18% on Thursday after the company announced chief executive Warren East was to step down at the end of 2022 after nearly eight years in the role.
Analysts at AJ Bell told Yahoo Finance UK that the announcement wiped £1.8bn ($2.4bn) off the engine giant's value as shares dropped 18.2% to 96.2p in afternoon trade in London.
"Shares in Rolls-Royce fell by even greater magnitude as investors reacted really badly to the resignation of CEO Warren East," Russ Mould, investment director at AJ Bell said. "Rolls-Royce was in a very tricky spot when he took over, with a string of damaging profit warnings in the early 2010s and a serious cash flow problem."
He added: "It has been pretty turbulent under East too, though in part that reflects a global pandemic which had a disastrous impact on Rolls-Royce’s aviation sector clients.
Its share price was also being hit due to a wider sell-off in travel-related stocks as it relies heavily on commercial air travel, and faces potential supply constraints as 20% of its titanium comes from Russia.
However, despite the crash today, experts say the stock has recovered well from the "dark days of October 2020", when it traded as low as 34.70p.
"Since those lows, the Rolls-Royce share price has more than trebled. However, over the last six months the shares have traded choppily between peaks of 150p in November and an element of buying interest just above the 100p area, with technical resistance just above the 200-day moving average," said Michael Hewson, chief analyst at CMC Markets.
News of the exit came as the group returned to profit last year after meeting its restructuring targets a year ahead of schedule.
The FTSE 100 (^FTSE) firm turned a £4bn loss in 2020 into a profit of £124m in 2021. Operating profit for the year to the end of December was £513m compared with a loss of £1.97bn in 2020 as cash burn declined 65.5%.
Revenue dipped 2% to £11.2bn from £11.49bn. This was hit by reduced income in Rolls-Royce’s largest civil aerospace section as a result of restructuring and the pandemic.
The aerospace company's pre-tax loss shrank to £294m from £2.8bn.
Rolls-Royce, one of Britain’s largest aerospace firms, reported earnings per share (EPS) of £1.48, an improvement on last year’s loss per share of £51.81.
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Net debt now stands at £5.2bn. Rolls-Royce had borrowed £7.3bn through fundraising and taking on more debt, it repaid a €750m ($841, £625m) bond along with a £300m loan from the Bank of England.
Looking ahead, the engine maker expects low-to-mid-single digit revenue growth and operating profit margin to be broadly unchanged and expects growth in its end markets as the impact of COVID subsides.
"We expect low-to-mid-single digit revenue growth and we expect our operating profit margin to be broadly unchanged as underlying operational improvement is balanced with increased engineering spend to develop sustainable growth opportunities," Warren added.
The chief exec oversaw a major restructuring programme that saw the culling of 9,000 jobs at the engine-maker in response to the sharp reduction in aircraft flying hours due to the pandemic. This helped it achieve its £1.3bn run-rate savings target.
"It doesn’t help that today’s results offer a less than winning legacy. The company has missed on earnings and margin guidance for 2022 is dismal looking," Mould added.
"Rolls desperately needs more planes in the air as its lucrative spares and repairs revenue from an installed base of engines is heavily dependent on flying hours."
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Allegra Dawes, senior analyst at Third Bridge, said: "Since wide body flying hours are not forecast to recover to 2019 levels until 2025, Rolls Royce’s has been optimising their civil aerospace business to make it more cash generative even with lower flight hours.
"Part of this improved cash generation is down to footprint and headcount reduction; another element is improved engine reliability. By effectively increasing each new engine's time on wing, Rolls Royce has spread their cost base, positioning them well, especially from 2024 and beyond."
The former ARM Holdings chief also positioned Rolls for the transition to the low carbon economy. He will stay on till the end of the year while the search for his successor continues.
"With the advances we have made, the momentum and energy we have shown and our firmer financial foundations, this is the right moment to look to the future," East added. "I am thoroughly committed to leading this business while we work towards a smooth leadership transition."
Speaking about his departure, East said it was a "privilege" to lead Rolls-Royce and that its a job which he "thoroughly" enjoyed.
"There have been challenges, but we have built on the cultural and organisational improvements we have made to work through them, deliver on our commitments and create a better business," he said.
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