ii view: Rolls-Royce maintains full-year outlook

Engine maker Rolls-Royce sees profit rise but suffers a cash outflow partly due to Brexit preparations.

Half-year results

• Revenue up 5% to £7.9 billion
• Adjusted operating profit up 32% to £203 million
• Dividend payment unchanged at 4.6p per share
• Full year guidance maintained

Chief executive Warren East said:

"We delivered further progress across the group in the first half in line with our full year expectations. We expect a significant improvement in cash in the second half as we unwind inventory built up to support customer deliveries and benefit from improved trading in both Power Systems and Civil Aerospace. In Civil Aerospace we delivered on key drivers of future cash flow with further improvement in average OE unit losses and continued aftermarket growth. Defence grew both revenue and profit and enjoyed substantial order intake. In Power Systems we also saw good revenue growth and order intake and entered the second half underpinned by a healthy backlog.”

ii round-up:

Engine and gas turbine maker Rolls-Royce Holdings (LSE:RR.) has customers in more than 150 countries, comprising more than 400 airlines and leasing customers, 160 armed forces, 70 navies, and more than 5,000 power and nuclear customers.

In 2018, the US generated the lion’s share of group revenue at around one third, followed by the UK and China at around 10% each. 

The company reported mixed progress in these half-year results. 

Group revenue and profit both rose aided by civil aerospace service sales and a reduction in widebody aircraft unit losses. Defence sales improved by 4%. But group free cash, a measure closely watched by investors, suffered an outflow of £429 million, partly a result of Brexit preparations and stock piling. 

The share price fell by over 2% in early UK stock market trading. 

ii view:

Under former ARM Chief Executive, Warren East, Rolls Royce has been looking to simplify and restructure to better position it going forward. Current results have seen the disposals of Commercial Marine and Power Development completed, while cost savings under the restructuring programme are expected to accelerate in the second half. 

The company makes an initial loss on the delivery of its civil aerospace engines 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 ten-year average offers encouragement. But the cyclicality of the airline industry, its core customers, needs to be remembered. 

Positives: 

• Full year guidance maintained
• Targeting at least £1 billion free cash flow by 2020
• Executing a 2-year cost saving restructuring programme 

Negatives:

• Group free cash outflow of £429 million
• Customer disruption due to Trent 1000 engine issues is ongoing
• Airbus' closing its A380 production line has resulted in an exceptional charge of £245 million

The average rating of stock market analysts:

Buy