Rolls guides on IFRS 15 impact

Chief executive Warren East’s well-documented efforts to simplify Rolls-Royce’s business model, following years of poor communication and high operating costs, has had a positive impact on the group’s power systems unit. Underlying divisional profit surged 61 per cent on single-digit revenue growth, reflecting a more favourable product mix, price discipline and lower overhead costs.

Encouragingly, Rolls’ core civil aerospace arm also returned to form in 2017. Record widebody engine deliveries, increased service revenues, and higher sales of spare parts comfortably offset remedial costs on the group’s malfunctioning engines, triggering a 34 per cent rise in divisional profit to £520m. Unfortunately, performance through 2018 will be held in check due to an extra £340m that management has earmarked to iron out operating issues, primarily ongoing maintenance problems with the Trent 1000 engine.

Under the new IFRS 15 accounting standard, which changes how Rolls books earnings on long-term contracts, management revealed a mid-point guidance for underlying operating profit of £400m in 2018, with an effective margin of error of £100m either way. The corresponding figure under the new treatment would have been £321m for 2017. Management is confident that extra maintenance costs – some engine parts will need to be redesigned – and new accounting standards won’t jeopardise its target to deliver £1bn of annual free cash flow “by around 2020”.

Bloomberg consensus estimates gives pre-tax profit of £729m for the Dec 2018 year-end, with adjusted EPS of 28.2p, rising to £997m and 37.6p in 2019