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Rollls-Royce Shares Plummet Another Yet Another Downgrade

Key Speakers And General Views At The Singapore Airshow Aviation Leadership SummitKey Speakers And General Views At The Singapore Airshow Aviation Leadership Summit
Shares soared as CFO David Smith dismissed suggestions of a dilutive share issue.Bloomberg Bloomberg via Getty Images

Britain’s Rolls-Royce Plc (RYCEY) issued its fourth profit warning in just over a year and said it may cut its dividend due to sharply weaker demand for spares and services for existing aero-engines, showing the scale of the challenge facing its new CEO.

Shares in the engine maker plunged more than 22% in early Thursday trading after it forecast profit next year would now be more than 30% below a current consensus estimate, which analysts had already slashed after a warning in July.

Rolls-Royce, the 131-year-old company based in Derby, England, shocked investors in July when it said profits from its aero-engine business, its biggest unit which accounts for about half of profits and which it is counting on for future growth, would shrink in 2016. The blow is particularly bitter, given that the aviation business is experiencing one of its biggest-ever booms thanks to the growth of air travel in Asia.

The downgrade, plus news the board would put the company’s shareholder payments policy under review, shows the extent of the challenge facing new CEO Warren East who started in July.

Releasing the findings of an operating review two weeks early, East said he had already highlighted a number of areas where Rolls-Royce could make “fundamental changes”, as he launched a restructuring programme to save between 150 million pounds and 200 million pounds ($304 million) a year, streamline senior management and improve decision-making.

But the company’s fourth profit warning in just over a year and its second for 2016 results could intensify questions about the shape of the group itself, which supplies engines to aeroplanes, ships and for industrial use.

Before revealing the civil aero engine unit was suffering, Rolls had already been struggling with a drop in demand from energy customers for its marine equipment following a plunge in oil prices. The shipping business is having a much harder time than aviation, as China’s economic slowdown slows the growth in seaborne trade.

RR said on Thursday it now expected profit ‘headwinds’ of 650 million pounds next year, up from the 300 million drag identified in July. Before the downgrade on Thursday, the consensus forecast for 2016 underlying pretax profit stood at 1.053 billion pounds.

Analysts at Jefferies said in the longer-term the company’s growth story remained intact.

“Some bad news on profits has probably arrived today rather than over a period of years,” they said.

“The relatively robust 2016 cash flow is some solace and likewise the new management team stamping its authority on things through a more profound restructuring.”

Rolls said operators of wide-bodied aircraft were taking delivery of new more fuel efficient planes and using older engines less, accounting for up to 150 million pounds worth of profit hit next year as it sells fewer spare parts and services for older engines.

The additional hit next year would come from weakness in demand for corporate and regional jet aftermarket services and the continued drag from lower demand from oil and gas customers.

There was more bad news for U.K. industry Thursday as BAe Systems Plc (BAESY), the country’s largest defense contractor, cuts its production forecast for Typhoon fighter jets, amid growing fears that a diplomatic row with Saudi Arabia has jeopardised the prospect for more orders from the desert kingdom.