Sir John Rose stepped down as the chief executive of Rolls-Royce Group this week, after 15 years at the helm of one of Britain’s most successful companies. His final year of office has not been easy after one of its engines on a Qantas jet with 469 people on board suffered a blowout and the aircraft was forced to make an emergency landing.
What is it?
One thing that Rolls-Royce isn’t is a luxury carmaker. That part of the business was hived off in 1971. The rights to produce Rolls-Royce motor cars was sold to BMW in 1998.
However, precision engineering remains at its core. Rolls-Royce Group is the world’s second-largest aircraft engine maker and produces parts for, among other things, submarines, nuclear power stations and fighter jets.
What are its strengths?
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Rolls-Royce is a global engineering success story, making it a rarity in a country that bemoans its lack of manufacturing prowess. It has customers in 120 countries, making it one of the most geographically diversified companies in the FTSE 100 index. It operates in some potentially volatile parts of the world, but the geographical spread helps to reduce political risks.
There are high barriers to entry for new competitors in the markets in which it operates — civil and defence aerospace, marine and energy, which require a high degree of technological knowledge.
Finally, being one of the most recognised brands in the world is a great help, especially when the business is competing on a global stage.
And its weaknesses?
It is susceptible to a range of global threats, including the repercussions from terrorism and political upheavals — the Middle East is a key market. Also, its operations that rely on the military are vulnerable to cuts in defence spending and export controls.
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Cuts in government spending are a general worry because some of its other divisions, such as its energy business, are also heavily dependent on state support. So is the increase in the price of metals, which raises the cost of raw materials.
What do the key numbers tell us?
Pre-tax profits were down 76 per cent to £702 million in the year to December 31. The board argues that this includes large swings in the foreign exchange markets that have nothing to do with its underlying performance. That is why the company emphasises underlying profit before taxation, which improved by 4 per cent to £955 million, against £915 million in 2009. Its order book is at a record £59.2 billion.
Does it pay dividends?
It is paying 16p a share for 2010, a 7 per cent increase on the 15p paid in 2009.
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Are its shares attractively valued?
It is on 14 times future earnings, which sounds expensive but is close to its five-year average.
Who are the key personnel?
Sir John will be succeeded by John Rishton, chief executive of the Dutch retail group Royal Ahold and a non-executive director at Rolls-Royce since 2007.
Have any directors been buying?
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A number of directors have sold as part of an executive share plan.
Any announcements coming up?
The annual general meeting takes place on May 6 .
What are its prospects?
Sir John leaves the company in great health and damage from the Qantas incident has been limited. Profits at its civil aerospace division fell 20 per cent last year because of the engine blowout, but the order book and revenues were up. Encouragingly, it has won some high-profile orders since then, with British Airways, among others, showing confidence in the company .
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There are short-term uncertainties. One of the first things with which Mr Rishton will have to grapple is a potential takeover of the German manufacturer Tognum. In the longer term, as a world leader in its field, it is in prime position to benefit from burgeoning demand from Asia, the Middle East and South America.
The shares are not cheap but have fallen more than the market this year.
Verdict Buy