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Rolls-Royce gets back in the trim after a turbulent period

The aero-engine giant has had to endure a period of extreme turbulence, but there are signs that the group is back in trim
July 28, 2016

The perception exists, no matter how unjustly, that we in the UK just don't make anything any more. So the recent travails of UK aerospace giant Rolls-Royce (RR.) has attracted a measure of disquiet, if not outright opprobrium, beyond the wider investment community. Earlier this year, the Derby-based group was forced to cut its dividend for the first time in almost 25 years, following on from a succession of profit warnings. Performance had been stymied by faltering demand, or order delays in some cases, most notably in respect of its marine and power-systems operations. But the fact that Rolls-Royce's share price registered a double-digit surge after it reported a half-year net loss of £1.77bn, while halving the dividend, suggests the market now accepts the iconic British engineer is in turnaround mode.

IC TIP: Hold at 770p

Admittedly, the loss for the first six months of 2016 came about due to a £2.16bn fair value charge following a mark-to-market revaluation of currency hedges once sterling hit the skids in the wake of the EU referendum. Discount that, along with other one-off effects, and underlying profit came in at £104m, still a long way adrift of the £439m generated last year, but in the black nonetheless.

Although the underlying result was ahead of City expectations, segmental revenue across the group remained under pressure, with minor declines in civil aerospace, defence aerospace and power systems revenue set against a 25 per cent pullback in the marine business. The outlook for the full year remains unchanged, with the majority of profit in train for the second half of 2016. And although you shouldn't read too much into currency effects, management made the point that full-year underlying revenue would increase by around £600m, assuming foreign-exchange rates remain unchanged from those at the end of June 2016.

JPMorgan recently updated projections for the December year-end with cash profit of £817m and EPS of 28.9p (from £1.5bn and 58.7p in 2015).

ROLLS-ROYCE (RR.)
ORD PRICE:770pMARKET VALUE:£14.2bn
TOUCH:770-774p12-MONTH HIGH:829pLOW: 492p
DIVIDEND YIELD:1.5%PE RATIO:na
NET ASSET VALUE:209p*NET DEBT:19%

Half-year to 30 JunTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)†
20156.370.3119.59.27
20166.46-2.15-96.74.60
% change+1---50

Ex-div: 20 Oct

Payment: 4 Jan

*Includes intangible assets of £4.99bn, or 271p a share

†Payments to shareholders are made in redeemable 'C' shares which they can retain or redeem for a cash equivalent