ii view: Rolls-Royce reports massive loss but more optimistic

Its civil aerospace business suffered badly in 2020, but defence faired better. We assess prospects. 

Full-year results to 31 December 2020

Chief executive Warren East said:

"The impact of the Covid-19 pandemic on the Group was felt most acutely by our Civil Aerospace business. In response, we took immediate actions to address our cost base, launching the largest restructuring in our recent history, consolidating our global manufacturing footprint and delivering significant cost reduction measures. We have taken decisive actions to enhance our financial resilience and permanently improve our operational efficiency, resulting in a regrettable, but unfortunately very necessary, reduction in the size of our workforce. 

"With the support of our stakeholders we successfully secured additional liquidity with a rights issue, bond issuance and further credit facilities put in place during the year. We have made a good start on our programme of disposals and will continue with this in 2021. We continue to invest in developing market-leading technology and low carbon opportunities in all our end markets, to create value for our stakeholders and ensure we are well positioned to take advantage of the transition to a lower carbon economy and growing demand for more sustainable power solutions."

ii round-up:

Aircraft engine maker Rolls-Royce (LSE:RR.) today reported 2020 results largely in line with its late January full-year trading update.

Expectations for 2021 stayed the same, although forecasts for 2022 hardened, with hopes for 2022 cash generation now leaning more towards management efficiency actions than expected air travel recovery. 

Roll-Royce shares gained by around 2% in UK trading, leaving them down by around 35% over the last year, although up by around 60% since late October and just prior to the announcement of Covid-19 vaccine success. Shares for plane makers Airbus (EURONEXT:AIR) and Boeing (NYSE:BA), which Rolls engines regularly power, are both up by similar amounts.

Roll-Royce management continues to expect a gradual market recovery for its core civil aerospace business in 2021, with a slow start to the year accelerating in the second half as global vaccine roll-outs progress and travel restrictions ease. 

Engine flying hours of 55% of those achieved in 2019 are forecast for 2021, up from 43% in 2020. Rolls is paid by its airline customers depending on how many hours its engines fly.

Largely grounded aircraft for its many airline customers since the start of the pandemic resulted in a full-year 2020 adjusted pre-tax loss of £3.96 billion. Down from a profit of £583 million in 2019.  

Group actions to battle the pandemic and conserve cash have included scrapping the dividend payment. Cost savings of more than £1 billion were achieved during 2020. Around 7,000 staff were lost, leaving the company on track to axe at least 9,000 jobs by the end of 2022.

Following on from a £2 billion cash raising in late 2020, group liquidity stood at approximately £9 billion as of the 2020 year-end, a level at which management is confident leaves the company well-positioned for the future. A programme to raise at least £2 billion from disposals is now underway. 

Outlook comments for its reciprocating engines and power systems business pointed to an expected improvement in order intake during the first half of 2021. This should convert into a recovery in sales from the second half of the year. 

Underlying revenue for its defence business rose by 4% to £3.4 billion during 2020. Its military aircraft engines power the Eurofighter Typhoon. Another good year for the division is anticipated by management. A step-change in growth prospects could be achieved if it were to win the B-52 engine replacement programme for the US Air Force and the future vertical long range assault aircraft competition for the US Army.

ii view:

Rolls-Royce operates across the three divisions of civil aerospace, power systems and defence. In 2019, civil aerospace generated just over half of all sales, power systems just under a quarter and defence the rest. Revenues for its core civil aerospace business fell by 37% over 2020, hit by the grounding of many of its engines. Large engine deliveries fell by nearly a half from 2019 to 264, power system sales fell by 17%, hit by commercial marine and lower tourism, while defence sales improved by 4%, aided by Eurofighter demand. 

For investors, the bleak impact of the pandemic is clear to see from these results. A significant loss was made, and the dividend remains firmly halted. Forward estimates are understandably tough to offer given the still many unknowns of the virus and any return to some form of normality. 

That said, some comfort can be taken from certain areas of guidance which are no worse than previously outlined. Rolls has taken drastic action to cut costs and preserve cash, and a £5 billion rescue package has given it more time to see out the pandemic. For now, while the shares remain high risk given the significant degree of outlook uncertainty, vaccines will hopefully prove a game changer, with Rolls now maybe just past the very worst of the pandemic. 

Positives: 

• Successfully raised a total of £5 billion 
• Ongoing management efficiency programme

Negatives:

• Highly uncertain outlook due to Covid-19
• Dividend suspended

The average rating of stock market analysts:

Hold