Rolls-Royce boss East delivering on plans

RECENT years have been turbulent for Rolls-Royce. However, Wednesday’s full year results showed CEO Warren East’s turnaround plans are working.

Underlying revenues came in 6 per cent higher at £15.1billion and pre-tax profits rose 25 per cent to £1.1bn. Every division at the Derby-based engineer delivered a stronger than expected performance.

The flagship Civil Aerospace division, where operating profits rose 34 per cent to £520million, and the Power Systems business, which saw profits jump 61 per cent to £330m, were the star performers.

The shares rose 12 per cent on the back of the numbers. We like the work East is doing. Improving the transparency of Rolls’ notoriously complex accounting and simplifying the group’s structure make perfect sense from a financial standpoint.

Unfortunately, this will come at a cost. Around 600 managerial roles have been cut, and the continued restructuring means there could be more to follow.

The plans to consolidate Rolls’ five current divisions into three could also see parts of the business put up for sale. Marine has been under particular pressure, with the future of the fuel injector business under review. A sale, which could raise $700m, seems likely.

Continued operational improvements should help Rolls generate stronger cash flows. That’s particularly important for shareholders – higher dividends will only be possible once the cash is rolling in.

The shares only offer a dividend yield of 1.4 per cent in the coming year. However, if the group can hit its target of generating £1bn of annual cash flows by 2020, there’s potential for the payout to grow significantly.

The catch is this still involves a fair bit of blue-sky thinking, and operating performance hasn’t been flawless.

Problems with turbine blades in the Trent 1000 and 900 series engines cost £170m last year, with another £580m expected to be soaked up by fixing the issue over the next two years.

The fact East is confident of hitting that magic £1bn number on cash flow despite these headwinds is testament to the progress he’s made. But we feel there’s still plenty left to do before Rolls is comfortably cruising.

“This article is designed for investors who make their own decisions without advice, if unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”