Interactive Investor

Insider: Pile into Rolls-Royce and Centrica

9th October 2015 09:42

Lee Wild from interactive investor

Bet on turnaround at sickly Rolls

It's been an awful five months for Rolls-Royce. In fact, the aerospace engineer has been in decline since the turn of 2014, sparked by a first profits warning in a decade from old boss John Rishton. Two more warnings followed and analysts fully expect more bad news, possibly at the third-quarter results on 12 November. It could be earlier.

Of course, under new chief executive Warren East, Rolls is undergoing significant change. As recently as this week, the company announced plans to tackle its problematic marine business. It supplies systems for oil rigs and rig supply vessels, so weak crude prices hurt. It will certainly put a dent in profits at the Power Systems division.

In July, East said the marine unit might make no money at all in 2015 and only £40 million at best. It had been tipped to turn a profit of £90-£120 million.

After two years of cost cutting, 1,000 corporate and administrative jobs will go by the end of the year, with the expected £40 million of annual savings diverted to investment in research and development. A £30 million restructuring charge will be taken, two-thirds in 2015 and the rest next year.

Panmure Gordon analyst Sanjay Jha thinks Rolls shares are only worth 520p. But three board members clearly think that's wide of the mark. They've just spent over £200,000 on shares at less than 740p. Two weeks ago they changed hands for as little as 636p, a four-year low.

Chairman Ian Davis has just bought 15,000 at 739.5p, taking his holding to 36,874. Finance director David Smith snapped up 2,684 at 739.5p, and former Ford number cruncher Lewis Booth paid over £73,000 for 10,000 shares at an equivalent of 734p.

Time to fuel up on Centrica?

Centrica shares have just fallen to a six-year low. They've lost almost half their value since 2013, and the new chief executive slashed the dividend by almost a third early this year following a series of profits warnings. But a plan is in place to turn things around, and top brass are betting on its success with a £282,000 share purchase.

Iain Conn, the former head of BP's refining and marketing division who sat on the board there for a decade, has bought 100,000 shares at 235.35p each. After a strategic review, Conn, who took over in January, has decided to cut spending on capital intensive gas exploration & production (E&P) and power generation by £1.5 billion over the next five years. Job cuts will also help slash annual costs by £750 million a year.

Non-executive director Steve Pusey joined the Centrica board six months ago and reckons the shares are good value. The former chief technology officer at Vodafone and ex-BT man has spent £47,000 on 20,000 shares at the same price as Conn.

Hold onto the shares until next spring and the pair will - barring any further cut in the payout - collect a fat dividend, too. Centrica shares currently offer a prospective yield of 5%. Watch out for a trading update, expected at some point next month.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.