It’s hard to assess whether the release of Rolls-Royce’s (RR.) half-year figures justified a 10 per cent mark up in the share price. The jet engine maker moved into profit with net earnings of £1.58bn, set against a loss of £1.77bn at the 2016 half-year mark. Last year’s descent into negative territory was the result of fair value revaluations on foreign currency contracts. The group employs hedging strategies aimed at offsetting currency fluctuations. This resulted in a £2.16bn charge during the comparable period, which has been replaced by a net fair value gain of £1.41bn this time around.
Reported figures show that sterling’s post-referendum decline has also had a beneficial effect on the top line, but if you strip out currency effects then group underlying revenue still increased by 6 per cent. This is a creditable result, particularly given improved contributions from the civil aerospace and power systems segments. Underlying profitability at the former segment contracted significantly at the year-end, but this period’s underlying profit of £173m stacks up well against the £31m at the 2016 half year. Indeed, civil aerospace large engine deliveries increased 27 per cent and the order book comprising 2,700 engines represents five years of production. There’s even greater visibility – and improving economics – on the Trent XWB engines that power the Airbus A350.
The share price pulled back on the day prior to these results after Rolls said that it was guiding away from earlier suggestions that it could reach £1bn in free cash flow by the end of the decade. We think the level of cash generation will continue to occupy the minds of analysts, specifically with reference to how rapidly inventory and receivables translate into improved cash streams. Both balance sheet measures expanded in the period under review, quite possibly as a result of where Rolls is in its production phasing, but the management of this will remain under scrutiny.
JPMorgan Cazenove gives adjusted pre-tax profit of £831m for the December year-end, leading to EPS of 32.8p, against £813m and 30.1p in 2016.
| ROLLS-ROYCE (RR.) | ||||
| ORD PRICE: | 971p | MARKET VALUE: | £17.9bn | |
| TOUCH: | 971-971.5p | 12-MONTH HIGH: | 981p | LOW: 630p |
| DIVIDEND YIELD: | 1.2% | PE RATIO: | na | |
| NET ASSET VALUE: | 176p* | NET DEBT: | 29% | |
| Half-year to | Turnover | Pre-tax | Earnings per | Dividend ** |
| 30 Jun | (£bn) | profit (£bn) | share (p) | per share (p) |
| 2016 | 6.46 | -2.15 | -96.7 | 4.6 |
| 2017 | 7.57 | 1.94 | 86.2 | 4.6 |
| % change | +17 | - | - | - |
| Ex-div: | 26 Oct | |||
| Payment: | 5 Jan | |||
| *Includes intangible assets of £5.27bn, or 286p a share. **Paid via an issue of 'C' shares | ||||
