Ups and Downs

Dino D'Amore
By Dino D'Amore February 12, 2016 17:19

Ups and Downs

Rolls-Royce shares soared 15% this morning after it slashed its dividend but held guidance; the lack of another profit warning alongside the bolstering of finances through the cut dividend was all it took. The final dividend payment has been halved to 7.1p, taking the full-year payment to 16.1p, compared with 2014’s total payout of 23.1p per share with plans afoot at Rolls-Royce to make a similar cut once again when the half year results are announced.

Rolls-Royce shares have been undervalued for a very long time now and even after this morning’s increases, they remain undervalued. Long-term shareholders will have mixed feelings however: the value of their holding has increased, but one of the most reliable dividend payments in the world, which has stayed true through financial crisis and market turmoil for over 20 years, is no more. Logic has prevailed at Rolls-Royce. Chief executive, Warren East, stated today that Rolls Royce would ‘rebuild’ the dividend over time.

East also set out progress on cost-cutting to improve Rolls’ performance, saying it was on target to make annual savings of £145m by the end of 2017. Rolls-Royce aims to reduce costs by between £150m and £200m a year, and the company has so far identified about half of this target.

Rolls-Royce reported underlying revenue of £13.4bn, £500m down on last year. The company blamed the decline on currency movements, and noted that the fall was just 1% at constant exchange rates. Underlying pre-tax profit was 12% lower at £1.4bn, and free cash cash-flow, was far better than expected at £179m. The order book rose by £2.7bn over the year to hit £76.4bn.

Rolls maintains a forecast of a pre-tax profit of £664m in 2016, and revenue slightly down on 2015’s level.

Meanwhile, Boeing shares have plummeted on 787 program concerns.

Analysts and shareholders are concerned that Boeing has overstated its estimates of future sales of the 787 and its share price has fallen by almost 10% on the widespread media reports that the US Securities & Exchange Commission (SEC) is investigating the US airframe manufacturer based on reports from a whistleblower.

Under programme accounting, which is fully compliant with GAAP standards, Boeing defers spending on research for new aircraft and its related costs to spread them over many years and offset them against projected sales of new aircraft. The unidentified whistleblower alleges that Boeing’s estimates of future sales of the 787 are overestimated. The rules state that the company must updates its estimates on future sales once it has a clearer picture of actual sales. The whistleblower claims to have evidence sales are suffering and the SEC is reported to be investigating this report. Neither Boeing nor the SEC have commented on the reports.

Although Boeing shares have been impacted following the news, some analysts are stating that a large adjustment to its accounting would probably not have a cash impact. Likewise, the SEC may decide not to take the investigation any further but should the uncertainty continue, it could damage investor sentiment.

While all this is going on, Capitol Hill this week has reaffirmed doubts about the ability to deal openly with Iranian airlines as a leading Republican on the House Foreign Affairs Committee yesterday charged the Obama administration with failing to follow the law by grounding an Iranian airline that provides logistical support to Iranian soldiers fighting in Syria. Rep. Ed Royce, R-Calif., who chairs the panel, accused the Obama administration of ignoring a sanctions law Congress passed by failing to take action against the airline, Mahan Air, and agreeing to cancel Interpol red notices against its chief executive and a senior manager as part of a deal to free five American hostages from Iran.

Royce used a Thursday oversight hearing on the Iran nuclear agreement to insist on an explanation of why the State and Treasury Departments have allowed the airline to continue ferrying its weapons and personnel into Syria. After the Iranian Quds Force commander flew to Moscow for a summit on launching a counter-offensive to bolster Syrian dictator Bashar Assad’s regime, the flights to Syria increased, he said.

“Instead of more actions to ground these planes, the White House agreed to lift an Interpol notice,” Royce said.

PIA needs to stick to its guns and the government should plough on regardless.

The recent spate of rioting in Pakistan over the plans to privatise PIA has left a number of airline protesters dead. It may sound callous but we should have expected such an impassioned protest. PIA has to cut its massive overblown workforce by at least a third in reality, which means laying off about 6,500 workers. But with the losses at the airline running to $3bn, the government has to act fast. No IPO can take place until the airline is put on an even footing through cutting staff numbers among others. We should all watch closely to see if the government sticks to the plan because if it caves in then the IPO will be very hard indeed to get off of the ground. But recent headlines in the national Pakistani press will impress many would-be investors as the airline remains a very strong brand and one that many Pakistanis feel strong national pride about. As a result, this airline can, and will, make great sums of money but only if it is allowed to be run correctly as a commercial venture.

Dino D'Amore
By Dino D'Amore February 12, 2016 17:19