A longstanding Rolls-Royce investor sold his entire stake in the aircraft engine company last month after its fifth profit warning in less than two years.
Neil Woodford has held Rolls shares for almost 10 years, but on Wednesday he said last month’s warning by the new chief executive, Warren East, had shaken his confidence in the business.
The prominent fund manager sold his remaining 2.2% stake in the business on 12 November, the day of the warning, which led Rolls’ share price to plunge by more than 20%. He sold about 41m shares at an average price of 540p, raising about £220m.
He did not wait for the company’s strategy review 12 days later, during which East promised £200m of cost savings and warned of senior-level job cuts.
Writing on his investment group’s website, Woodford said: “[Rolls’] problems, which initially had affected the military aerospace and marine businesses, now appear to have spread to the core civil aerospace business. This has resulted in material downgrades to profit and cash expectations, and to such an extent that it is now likely that the dividend will be cut in 2016.”
The civil aerospace business was “pretty opaque and difficult to analyse”, he said. It initially made losses on engine deliveries, which were recouped over many years by airline customers taking out service contracts.
Woodford said: “This is a very long-term business, which is sensitive to assumptions around manufacturing and servicing costs and operational metrics – such as the number of hours flown, reliability and operational longevity. Our decision to sell the shares reflects a significantly increased level of uncertainty about how these metrics will play out over the next three to five years in a way which will benefit Rolls’ shareholders.”
But he said he intended to remain in contact with the company to monitor progress under East’s leadership – “which we rate highly” – and raised the possibility of investing in the company again.
A spokesman for Rolls-Royce said: “While we do not comment on individual analyst or investor opinions, Warren East has made very clear his confidence in Rolls-Royce as a great business with significant growth potential. While we are suffering the impact of short-term headwinds in several of our markets, action is being taken to make the business more resilient and sustainable through our ongoing wide-ranging restructuring.”
Woodford’s move is in contrast to US activist investor ValueAct, which doubled its stake to 10% last month to become the company’s biggest shareholder. ValueAct is poised to gain a seat on the board, and is keen to see two businesses – marine engines and reactors for nuclear submarines – sold off so Rolls can concentrate on its aerospace operations.
