Rolls-Royce says it will return to growth next year after an expected profit fall due to shrinking defence spending and a struggling marine business.
Rolls-Royce alarmed markets in February by announcing there would be a pause in profit growth in 2014, after 11-years of strong profit and revenue growth as the company absorbed the impact of declining Western military budgets.
The world's second-largest maker of aircraft engines posted underlying pre-tax profit of £644m in the six months to June, beating a consensus forecast of £607m.
Rolls-Royce made £1.76bn in pre-tax profit in 2013, but has said that this year's profits would be two-thirds weighted to the second half and reiterated guidance for flat profit this year.
"We expect significant improvement in profit for the second half driven by higher revenue and cost reduction. While there are challenges, we maintain our full-year guidance for the group," Chief Executive John Rishton said in a statement.
“The prospects for long-term growth remain outstanding across the Group and in particular in civil large engines where our market share of engines on order is over 50 per cent. However, we will experience growing pains. For example, we are investing in new capacity ahead of delivering our order book and restructuring existing facilities to improve efficiency.”
But the predictions have failed to fully convince analysts, whose consensus forecast stands slightly below Rolls-Royce’s figures at £1.65bn pounds, according to Thomson Reuters data.
"There is still a hill to climb in the second half and the sceptics out there aren't going to get completely comfortable until the third quarter management statement. We're caught in a holding pattern until we get more medium-term guidance," Liberum analyst Ben Bourne said.
Among the challenges faced by the business are difficulties in its marine business, which supplies power systems to ships, where profit was seen down 15 per cent to 25 per cent this year, worse than the 10 per cent decline forecast in May.
Espirito Santo analyst Edward Stacey said the nuclear and energy division's strong profit growth – estimated by the company at around 30 to 40 per cent – would help compensate for marine's poor performance, but noted that Rolls-Royce had already agreed to sell part of this division – its gas turbine and compressor business – to Siemens for £785m earlier this year.
"So actually the ongoing Rolls-Royce businesses are a bit weaker than previous guidance," he said, when asked about the share price weakness.