Aerospace engineer Rolls-Royce (RR.) is working hard to address investor concerns but the hint of another profit warning in chief executive Warren East’s interview with the Financial Times (21 Dec) suggests it is too soon for investors to play any turnaround.

Its brand name is a benchmark of quality in the English language but five profit warnings in less than two years have left its reputation in tatters.

The appointment of East appears a sound move and the capital markets day on 24 November afforded the former ARM (ARM) chief an opportunity to set out the group’s roadmap to a more a credible investment case based on steady cash flow growth. On 16 December East revealed plans to axe its two-division structure as well as scrapping a whole layer of management. Under the changes, the heads of five units: civil aero-engines, defence, nuclear, marine, and power systems, will report directly to the CEO.

Analysts are unconvinced. There’s a very real sense that more bad news is on the horizon and this impression was backed up by East’s FT interview where the CEO highlighted downside risks to the performance of the aerospace group’s diesel engine business. This is the only division to have so far escaped a downgrade in the past five profit warnings. The company says there is no change to official guidance but the risks to forecasts definitely look weighted to the downside.

A renationalisation of the group’s nuclear business is being threatened and there is even talk of a tie-up with BAE Systems (BA.). A major update to management and forecasting systems is underway but this is going to take anything from 12 to 18 months.

Andrew Gollan at Berenberg says the strategic review offered ‘little new information to help us to fully understand the collapse in Civil Aerospace profits over the last six months. Hence, it remains difficult to derive a forecast with much certainty.’

Some activist investors will doubtless continue to push for the currently trailing marine business to be hived off thus creating a more focused aerospace offering. Some would argue there are signs that Rolls-Royce’s strategy of surrounding the core civil business with other activities with differing cash dynamics has proven to largely be a positive over the past 10 years.

Unfortunately, a severe downturn in marine cash flows has coincided with a flat period for civil cash generation - a big factor in its current troubles.

With further trouble ahead, Rolls looks unlikely to regain altitude any time soon.

SWOT ANALYSIS

STRENGTHS

• Strong orders for the Trent-XWB engine

• Rolls maintains a robust defence aerospace position

• Strong naval business

WEAKNESSES

• Disappointing cash flow on Trent 700 and Trent 1000 engines

• Short-term unpredictability in cash flow

• Low fuel costs slowing engine replacement

OPPORTUNITIES

• Nascent civil nuclear potential

• Civil aerospace continues to grow in widebody jet engines

• Pick up in delivery of newer, fuel-efficient aircraft

THREATS

• Self-help disappoints

• Investor activism

• Continued marine underperformance