Rolls-Royce (RR.) is making a habit of winning over investors on result days. The embattled jet engine maker faces no shortage of problems, yet still managed to tick all the right boxes at the half-way point, upgrading guidance, outperforming lowly analyst estimates and reiterating its ambitious pledge to generate £1bn of free cash flow by 2020.
Statutory figures were blighted by the usual roll-call of ugly one-off costs. This time around, they were attributed to another dose of Warren East’s efficiency measures, a hefty loss on the group’s foreign currency contracts, and a £554m charge booked to handle the “abnormal costs” associated with fixing malfunctioning Trent 1000 engines.
Management doesn’t believe these exceptional expenses offer an accurate reflection of Roll’s progress, and so urges investors to focus on its underlying figures instead. Based on those more favourable metrics, heavy statutory losses were replaced with a £81m pre-tax profit, an attractive outcome considering that analysts expected the group to post a £60m loss.
Underlying profits were boosted by a variety of cost reduction and efficiency measures, as well as positive trading conditions across key end markets. The engineer’s power systems segment delivered double-digit original equipment and services revenue growth, while its core civil aerospace arm narrowed its underlying operating profit loss by £149m to £112m after reducing cash deficits on original equipment engine sales by 15 per cent and experiencing stronger appetite for high-margin replacement and maintenance work.
Better cash flows from its civil aerospace aftermarket, together with higher deposit inflows at defence and a more balanced profile of civil spare engine deliveries, enabled Rolls to register a much improved free cash inflow of £10m across its core businesses, despite reporting additional R&D and Trent engine expenses. Management now expects free cash flow, a measure closely watched by investors, to reach the upper end of its earlier guidance of between £350m and £550m. It also predicts that underlying operating profit for the full-year will come in at about £450m, give or take £100m, up from its previous target of between £300m to £500m.
Bloomberg consensus estimates give pre-tax profit of £330.6m and adjusted EPS of 13.7p for the Dec 2018 year-end, rising to £661.2m and 26.7p in 2019.
| ROLLS-ROYCE (RR.) | ||||
| ORD PRICE: | 1,036p | MARKET VALUE: | £19.37bn | |
| TOUCH: | 1,036-1,037p | 12-MONTH HIGH: | 1,050p | LOW: 793p |
| DIVIDEND YIELD: | 1.1% | PE RATIO: | 12 | |
| NET ASSET VALUE: | 40p* | NET DEBT: | 8% | |
| Half-year to 30 June | Turnover (£bn) | Pre-tax profit (£bn) | Earnings per share (p) | Dividend *** per share (p) |
| 2017** | 6.66 | 1.44 | 63.9 | 4.6 |
| 2018 | 7.49 | -1.26 | -52.0 | 4.6 |
| % change | +12 | - | - | - |
| Ex-div: | 25 Oct | |||
| Payment: | 3 Jan | |||
| *Includes intangible assets of £5.27bn, or 282p a share **Restated for IFRS15 ***Paid via an issue of 'C' shares | ||||
