At first glance, half-year results from Rolls-Royce (RR.) look impressive. Revenues rocketed, underlying pre-tax profits rose over a third to £840m and the order book broke above £69bn. But chief executive John Rishton is unhappy with progress on costs and cash flow, and the inclusion of German engines maker Tognum for the first time and the sale of its stake in International Aero Engines (IAE) last year complicate an already complex business. Still, even when everything is put through the wash these numbers look solid. What's more, a cultural shift under way at the civil aerospace business should drive cost savings there, and maintaining guidance for "modest" revenue growth and "good" profit growth this year underpins our positive view.
Tognum's first contribution since Rolls and Daimler bought it two years ago obviously helps - the operation added £1.1bn of revenue, £53m of underlying pre-tax profit and £1.8bn of orders. But last year's £699m windfall from IAE was a one-off and reported profit tumbled 30 per cent. Earnings per share were blighted further by a £1bn paper loss on foreign exchange contracts. More importantly, underlying profit grew 32 per cent, revenue rose 9 per cent and the order book increased by 12 per cent even without Tognum.
Again, civil aerospace was the driver, with £10.9bn of new orders, mostly for its Trent engines. Higher volumes and £112m from the IAE restructuring swelled margins and profit rocketed 59 per cent to £486m. Predictably, defence orders were down, although profit rose 10 per cent to £211m. New orders fell at the marine division, unable to match last year's £1.1bn submarine reactor core contract with the MoD, but 21 per cent growth in services revenue to well over £500m is encouraging. Elsewhere, a sharp slowdown in fracking activity helped wipe 45 per cent off profit at power systems, which includes Tognum. Still, there's good order cover and business is improving, so management continues to expect flat profit there this year.
Broker Liberum Capital expects full-year adjusted pre-tax profit of £1.72bn and adjusted EPS of 66.4p, up from £1.43bn and 58.5p, respectively, in 2012.
ROLLS-ROYCE (RR.) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,218p | MARKET VALUE: | £22.9bn | |
| TOUCH: | 1,217-1,218p | 12-MONTH HIGH: | 1,240p | Low: 797p |
| DIVIDEND YIELD: | 1.7% | PE RATIO: | 30 | |
| NET ASSET VALUE: | 237p* | NET CASH: | £921m | |
| Half-year to 30 Jun | Turnover (£bn) | Pre-tax profit (£bn) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 5.72 | 1.27 | 65.5 | 7.60 |
| 2013 | 7.35 | 0.88 | -19.2 | 8.60 |
| % change | +28 | -30 | - | +13 |
Ex-div: 23 Oct Payment: 6 Jan *Includes intangible assets of £4.99bn, or 266p a share | ||||
