ii view: Roll-Royce shares revs higher

Trent engine issues again overshadowed but progress is being made.

Full-year results to 31 December 2019

• Revenue up 5% to £16.6 billion
• Operating loss of £852 million, improved from a loss of £1.16 billion in 2018
• Adjusted operating profit up 25% to £808 million
• Dividend payment unchanged at 11.7p per share

Chief executive Warren East said:

"After a challenging first half, we had a good end to 2019, delivering 25% growth in full year underlying operating profit and an encouraging level of free cash flow. Our restructuring efforts gained momentum, with run-rate cost savings of £269 million. Civil Aerospace improved its underlying profit significantly, with record engine deliveries, good aftermarket performance and improved OE unit losses. We made further progress on the Trent 1000; cash costs are in line with guidance. We remain on target to reduce aircraft on ground to single digits by the end of Q2 2020.

We continued to invest significantly in R&D and took important steps towards becoming a leader in low carbon technologies. We grew our electrical capabilities with the acquisitions of Siemens' eAircraft business and a majority stake in Qinous, as well as developing new in-house hybrid-electric solutions."

ii round-up:

Aircraft engine maker and defence contractor, Rolls-Royce (LSE:RR.), reported results which surprised to the upside in this latest update. 

While sales and profits broadly matched city forecasts, free cash flow or cash available to pay investors after paying the costs of conducting business, comfortably surpassed estimates, buoyed by insurance receipts from its troubled Trent 1000 engine. 

Progress in fixing issues with the Trent 1000 engine, which powers Boeing (NYSE:BA) 787 Dreamliner, was also reported, with the roll-out of fixes continuing. 

The shares proved one of few risers in the coronavirus hit FTSE 100 index, gaining by more than 6% in midday UK trading. 

Costs largely relating to the Trent engine pushed Rolls to an overall loss of £852 million, although when excluded, a profit up over 25% was declared.

Record order intake of £5.3 billion was won for its defence business, while sales at its power systems division rose by 4%.

As for the evolving coronavirus situation, estimates for 2020, for now, exclude any material impact.  

ii view:

Under former ARM chief executive, Warren East, Rolls Royce has been looking to simplify and restructure to better position itself going forward. Disposals of Commercial Marine and Power Development businesses were previously completed, while cost savings of £269 million have been achieved since June 2018. 

The civil aerospace engine business accounts for just over half of group sales. Rolls makes an initial loss on the delivery of each engine and aims to make a profit in the longer-term by including maintenance contracts.

For investors, progress in restructuring the company is being made. A price/earnings ratio below the 10-year average offers encouragement. But the unpredictability of the airline industry, its core customers, needs to be remembered, while a dividend yield of around 2% (not guaranteed), and the current lack of growth, compensate little for a share price trading at multi-year lows.

Positives: 

• Diversity of product and geographical end-markets
• Cost saving restructuring plan on track

Negatives:

• Exposure to the volatile airline industry
• A credit rating one notch above junk

The average rating of stock market analysts:

Strong hold