The Times - UK (2020-08-28)

38 1GM Friday August 28 2020 | the times

Business

-47%

Large engine flying

hours lost in first

half

Losing power

2012

In numbers

£5.4bn

Interim pre-tax loss

£4bn

Cash burn

(by end 2020)

9,000

Job cuts

Behind the story

I

t takes two to make a market —

and so it is with opinions in the

City on Rolls-Royce (Robert

Lea writes).

The stock’s most dyspeptic

bear in the Square Mile is David

Perry, a JP Morgan Cazenove

analyst. He says that investors

should take Rolls at its word, citing

the company’s opinion of its

situation as “a severe but plausible

downside scenario” and its fears

about “inherent uncertainty over the

severity, extent and duration of the

disruption... the availability of

sufficient funding... material

uncertainties... significant doubt on

the group’s ability to continue as a

going concern”.

He believes that the hole opening

up in the Rolls-Royce balance sheet

is in the order of £8 billion and is the

sort of money that the company

needs to raise from its shareholders

after the £2 billion disposal

programme to which the company

has committed itself. Mr Perry has

long been a critic of Rolls’ ability to

come up with new and unexpected

bad news, or worse figures than

people had been expecting. In short,

he believes the company’s shares are

worth just 90p.

In a parallel reality, Sandy Morris,

1

Downing Street has been

warned that Boris Johnson has

less than two weeks to save

post-Brexit trade and security

talks, according to senior

European Union sources. Michel

Barnier, the EU’s chief negotiator,

and David Frost, his British

equivalent, will hold emergency

talks next week in an attempt to

try to save the negotiations, The

Times understands. Page 2

2

Storm Francis helped wind

power to generate its highest

share on record of Britain’s

electricity needs in the early hours

of Wednesday. Turbines produced

almost 60 per cent of power

output as the storm blew through,

with gusts of almost 80 mph. The

renewable energy record follows

Britain’s longest period without

usage from coal-fired power

stations. Page 23

3

America’s central bank will let

inflation overshoot its 2 per

cent target under a new

monetary framework that will

keep interest rates lower for longer

to support jobs and growth.

Jerome Powell, chairman of the

US Federal Reserve, unveiled a

“flexible form of average inflation

targeting” and shifted the

emphasis towards employment.

Page 37

4

Walmart, the American

supermarket chain and owner

of Asda, entered the

competition to buy TikTok, as the

video sharing app’s boss said that

he was quitting after only three

months in the role. Page 37

5

Matt Moulding, founder of

The Hut Group, the website

provider, will collect about

£19.4 million a year in rent from

the company after striking a deal

to become its landlord before a

flotation valuing it at £4.5 billion.

Page 37

6

Rolls-Royce, the engineering

group, issued a chilling

warning about its ability to

carry on in business during the

pandemic as it reported a

£5.4 billion half-year loss and as its

finance director jumped ship.

7

Companies are regaining

confidence in the economy but

are still deeply cautious about

the outlook, according to the latest

Lloyds Bank business barometer.

Page 40

8

The number of new claims for

unemployment benefit in the

United States remained

around a million last week,

prompting concerns that the

country’s economic recovery is

stalling. Page 40

9

Gamblers bored by the dearth

of sports betting during

lockdown turned to online

poker and boosted the fortunes of

Flutter Entertainment, the group

behind Paddy Power and Betfair.

Revenue in the six months to the

end of June climbed by 49 per cent

to £1.5 billion and adjusted profits

were up by 59 per cent at

£342 million. Page 42

10

The London stock market

is set for its largest

technology takeover since

Covid-19 hit global equities after

RWS and SDL, two leading British

translation companies, agreed to

merge. Page 43

Need to know

Rolls-Royce

fears for the

future after

record loss

Robert Lea Industrial Editor

Rolls-Royce issued a chilling warning

yesterday about its ability to carry on in

business during the pandemic as it

reported a £5.4 billion half-year loss

and as its finance director jumped ship.

The engineering group said that

there was “a severe but plausible down-

side scenario” that its operations and

markets would be further ravaged by

economic instability.

It warned that “the inherent uncer-

tainty over the severity, extent and

duration of the disruption caused by

the Covid-19 pandemic — and there-

fore the timing of recovery of commer-

cial aviation and the availability of

sufficient funding — represent ma-

terial uncertainties that may cast signif-

icant doubt on the group’s ability to

continue as a going concern”.

In its six-month accounts, Rolls also

revealed that its cash-burn was expec-

ted to top £4 billion by the end of the

year and that it did not expect a full

recovery until 2025. The losses and the

bleak outlook sent the company’s

shares falling back towards fresh 15-

year lows, closing down 3p, or 1.2 per

cent, at 250p.

Rolls-Royce produces jet engines for

long-haul aircraft built by Airbus and

Boeing. It also makes propulsion

systems for Royal Navy warships and

nuclear submarines and engines for

trains, including Britain’s new intercity

fleet. It has been hobbled by the col-

lapse in air travel during the pandemic

and the subsequent economic lock-

downs and restrictions on movements.

About £4 billion a year, or a quarter of

group revenue, is tied through service

contracts to the flying hours of 5,000

engines on aircraft such as the Boeing

787 Dreamliner and the Airbus A350,

A380 and A330 for airlines such as

British Airways and Virgin Atlantic. Its

future revenues in civil aerospace, ac-

counting for half of group revenues,

were hit by the drop in demand for new

aircraft.

In the midst of all this, Warren East,

58, the company’s chief executive, has

lost his finance director. Rolls gave

Stephen Daintith a £3.3 million “golden

hello” in shares when it recruited him

from Daily Mail & General Trust three

years ago, but with the value of those

shares shredded and his subsequent

share option awards deeply under-

water, Mr Daintith, 56, is off to join

Ocado, the online grocer.

For the first six months of 2020, Rolls’

revenues fell by 26 per cent to £5.8 bil-

lion and it tumbled to an operating loss

of £1.7 billion. Net debt has spiralled by

a third to £4 billion.

Write-offs and impairment charges

and a huge loss on its currency hedging

sent the group £5.4 billion into the red.

With a forecast loss of £10 billion of

dollar-denominated revenues in the

next few years, it will have to spend

£2.6 billion unwinding its dollar-ster-

ling currency fluctuation hedges.

Rolls, which has put ITP Aero , its

£1 billion-rated Spanish business up for

sale, said that it had identified other

divisions worth a further £1 billion for

disposal. The City is expecting a multi-

billion-pound rights issue fundraising

from shareholders in the next few

months.

Mr East said that he did not expect

civil aerospace to make a full recovery

to last year’s levels until 2025. Rolls

expects the sector to be down by 50 per

cent for 2020, off by 30 per cent in 2021

and operating at 90 per cent in 2022.

Compared with the 450 engines it was

supposed to make this year, mainly for

the Airbus A350, it expects to deliver

only 250 a year for the foreseeable

future.

The company is laying off 9,000

people, or 15 per cent of its workforce,

3,000 of them in Britain. About 8,000

are in civil aerospace, reducing the

division by a third. It is to cut its eleven

main locations to six, with Derby re-

focused as the main engine assembly

plant.

The restructurings and redundan-

cies were “absolutely vital” to save the

business, Mr East said. Of the going

concern warning, he added: “We are

being literal and honest.”

ITV faces relegation after ads collapse

ITV looks set to be kicked out of the

FTSE 100 when the London Stock

Exchange carries out its latest quarterly

reshuffle next week.

The broadcaster has been a feature of

the Footsie, the Premier League of

London’s biggest companies, since 2011,

but its value has fallen by more than

half this year to £2.5 billion.

Also facing demotion is British Land,

whose market capitalisation has fallen

by 43 per cent in 2020 to £3.4 billion,

leaving it right on the cut line. Com-

mercial landlords have taken a beating

as tenants struggle to keep up with their

rents, while Covid-19 has exacerbated

the already-declining value of office

blocks and shopping centres.

ITV’s advertising revenues plunged

by 42 per cent in the second quarter.

The pandemic has caused the economy

to tank, taking marketing spending

with it as businesses, with little to pro-

mote, cut their budgets.

Lockdown also forced ITV to halt the

filming of some of its shows, including

Love Island, which is popular with the

young adults who advertisers try to tar-

get. “The longer-term trend of compe-

tition from streaming services and rival

broadcast technologies is a huge factor

as well,” Russ Mould, investment di-

rector at AJ Bell, the broker, noted.

It would be the second time that ITV

has been demoted to the FTSE 250. The

last time was in 2008 as the financial

crisis loomed.

Looking to make the step up to

London’s top tier is B&M, the discount

retailer, whose shares have surged by

more than a quarter in 2020 to leave it

with a market cap of close to £5 billion.

Its 656 stores were allowed to stay

open during lockdown, which helped it

to pinch sales of DIY and gardening

products from the likes of B&Q. It may

have staying power, too, as analysts

point out that its value offering leaves it

well-placed during hard times.

The formal reshuffle will be based on

the closing values of companies on

September 1.

Tom Howard

continued from page 37

Hut Group founder’s rent deal

total £19.53 million in rent last year and

this will be collected by Mr Moulding

once The Hut Group is public.

Francisco López de Saa, of Minerva,

a corporate governance firm, said that

the rent was “an outrageous amount...

There should be a separation of chief

executive and chairman roles to pro-

vide a better balance of authority and

ensure the company is responsibly

aligned with the interests of investors.”

The company’s valuation was fixed at

the outset of the listing process. Mr

Moulding said this meant that he had

been able to “pick my backers”. He

defended his dual title by saying that it

was common with the world’s largest

companies, including Blackrock and

JP Morgan.