Rolls-Royce finally moving into a higher gear
IT’S ALWAYS difficult to know what to focus on in the busy summer reporting season. But with Rolls-Royce’s half-year numbers sending the shares up over 7 per cent on Thursday, they are well worthy of a closer look.
While the group reported a £775million operating loss, that was largely due to one-off events and currency movements. The adjusted profit figure is £141million, much improved on the £84million loss of last year, and ahead of Rolls’ previous expectations.
The improvements came across the board. That’s particularly encouraging, as it provides some early vindication for CEO Warren East’s strategy.
Prior to being bought out by SoftBank in 2016, East enjoyed a successful run as head of ARM Holdings. It’s finally starting to look like he’s got Rolls moving into a higher gear, too.
After selling the commercial marine and fuel injection businesses, Rolls is now focused around three core divisions.
Civil Aerospace, which employs about 24,000 staff, is the group’s largest by revenue. It makes the engines for wide-body planes – think of the big, intercontinental carriers like the Boeing 787. The division has been struggling these last few years. The fact it’s still loss-making, even before accounting for hundreds of millions of pounds worth of costs arising from difficulties with the Trent engine series, means those difficulties haven’t yet passed.
There are signs of life, though. Revenues from maintaining engines already in service are growing again and the next generation of engines is coming through. The operating loss is getting smaller, too.
The net effect is Rolls is confident both profits and cash flows will materially improve, and at a faster rate than it had originally hoped. Management reckon free cash flow will be north of £1billion in 2020.
Rolls is still some way off achieving these targets, so we can’t say the engine is roaring just yet. Nonetheless, it looks like East has at last got things ticking over.
The potential for this momentum to continue could make the shares an attractive recovery play.
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