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Rolls-Royce relying on second-half improvement to meet outlook

A man walks past a former Rolls Royce site in Derby, Britain February 12, 2016. REUTERS/Darren Staples

By Sarah Young

LONDON (Reuters) - British aerospace and industrial power engineering company Rolls-Royce (RR.L) reiterated its forecast for 2016 on Thursday but said it expected the bulk of profits would only come through in the second half of the year, worrying investors.

Concerns over the scale of the challenge faced by Rolls-Royce to deliver on forecasts sent shares in the maker of aircraft engines down 6 percent to 605 pence at 0757 GMT.

The company, seeking to convince investors that the company's financial performance had stabilised after downgrading profit forecasts three times last year, said it expected to be close to breakeven for the first six months of the year.

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"This leaves Rolls with a lot to do in the second half of the year if it is to meet its 2016 targets," Royal Bank of Canada analysts said in a note.

Rolls-Royce has over the last two years been hit by cancelled orders from oil industry customers for power systems after a plunge in the oil price, and a slowdown in demand for the high-margin aftermarket servicing it provides for older aircraft engines.

Analysts expect Rolls-Royce's 2016 pretax profit to halve to 642 million pounds according to Thomson Reuters data, down from 1.36 billion in 2015.

The company said that in the second half it expected profits to benefit from higher large aircraft engine deliveries, growth in revenues from servicing engines and the benefits of an existing cost-cutting plan.

But RBC analysts said that its separate oil and gas industry market remained weak and questioned some of Rolls-Royce's assumptions.

"Rolls is also putting a lot of faith in improved after-market results in the second half, despite recent trends that have seen older Rolls-powered planes flying less than expected," they said.

The fall in the stock's value on Thursday followed its 22 percent rise since Feb. 12 when it maintained its 2016 forecast, giving investors confidence that it had turned a corner. That FTSE index-beating run reversed some of the stock's 34 percent decline in 2015.

Last year the company warned that 2016 would be "challenging", setting out a restructuring plan with the aim of saving between 150 million pounds and 200 million pounds a year by 2017 by cutting staff and streamlining management.

The cost-saving plan was on track, the company said on Thursday ahead of its annual meeting, when Chief Executive Warren East will face shareholders for the first time since he took on the top job last July.

Rolls-Royce said it would provide more details on its progress at the time of its first-half results.

(Reporting by Sarah Young; Editing by Paul Sandle, Greg Mahlich)