Rolls shares leap by 10pc as East’s turnaround starts to take off
ROLLS-ROYCE shares soared 10pc yesterday after the engineer’s results beat City forecasts, signalling that its turnaround is taking hold.
The gain added £1.7bn to the company’s market value and more than reversed the 4.4pc drop the shares suffered on Monday as fears grew that chief executive Warren East’s recovery plan for the aircraft engine maker was running out of steam.
Mr East, who took the helm in the summer of 2015, has consistently said he wants the blue-chip engineering business to be generating £1bn of cash a year by 2020, reversing the current situation where Rolls is spending far more than it is making.
However, speculation that Rolls was backing away from this “ambition” drove down the shares at the start of the week – fears which Mr East yesterday dismissed as “noise”.
“We are not changing the story one iota,” he said, as Rolls posted half-year results showing reported revenue of £7.57bn, up from £6.46bn a year ago. “The noise is not coming from us, we fully expect to go above £1bn in cash generation at some point.” The £1bn was a “rallying cry” for the company, Mr East said, adding that he “did not want to be tied down by exact dates”.
Investors jumped on the news, sending the shares up 91p to 979p, a twoyear high.
In the six months to the end of June pre-tax profit soared to £1.94bn, reversing last time round’s £2.15bn plunge into the red, though the company conceded the improvement in profit was heavily influenced by currency movements. Rolls has a huge “hedge book” of foreign exchange deals aimed at protecting it from currency fluctuations and the strengthening of the pound since the start of the year meant these assets received a £1.4bn lift. Rolls noted that this was the “principal reason” for the strong results at a headline level.
On an underlying basis, which strips out currency movements and is Rolls’s preferred measure, revenue was £6.87bn, up 6pc. Pre-tax profit was £287m, a gain of 148pc. The weaker pound has inflated Rolls’s figures, as the bulk of the aviation industry’s deals are done in US dollars.
Free cash flow – the measure of how much money the company generates after expenses, and a key figure for Mr East – was negative £339m, meaning the company is spending more than it is making. This was still an improvement on the figure a year ago, which was negative £414m.
The company is investing heavily in engine production as it tries to double output to 600 engines a year. Rolls sells the engines at a loss, making profits from servicing them in future years. The chief executive said Rolls’s deliveries of jet engines for airlines were up 27pc.
Mr East added cost savings from his “simplification” restructuring “were ahead of plan”, with a target of delivering £200m a year in cost cuts by 2018.
Analysts said that Mr East had deliberately been downbeat to manage expectations. “Warren is being smart by under-promising and over-delivering,” said one.
The order book at the end of the six months stood at £82.7bn, up from £79.5bn at the same point a year ago. The dividend was held at 4.6p.