Rolls-Royce's (RR.) string of profit warnings has continued today, with the new CEO Warren East lowering the firm's full-year guidance amid weakness in its Civil Aerospace business and its Marine division.
We're adjusting our model for the latest revision, which will likely result in a modest decrease to our 953p-per-share fair value estimate. We're maintaining our narrow economic moat on the company.
Rolls-Royce's main drag in the first half was its Marine division, which saw sizeable profit deterioration due to continuing weakness in demand from its offshore client base. We expect this weakness to persist as market conditions remain challenging, and the company is expecting to commence a restructuring programme in this unit, potentially including asset impairments.
In its Civil Aerospace business, the firm saw weak demand and pricing for its Trent 700 engines. While Rolls-Royce is transitioning to the new Trent 7000 engine, it is still depending on Trent 700 to support this segment. Given current trends, the firm now expects a £300 million headwind in 2016.
Surprisingly enough, the company maintained its full-year top line guidance for 2015, only lowering its profit forecast. The downward revision in profit, while not substantial in magnitude, was sufficient enough to force the firm to suspend its share buyback programme.