Rolls-Royce decimated by Covid-19 fallout

That is a huge problem given that Rolls operates a ‘power-by-the-hour’ business model whereby its engines are typically sold at a loss and earn revenue according to how long they spend up in the air. Alongside a 50 per cent year-on-year reduction in engine deliveries and a £866m blow from work that will no longer be needed on long-term service agreements, underlying revenue from civil aerospace tumbled by more than a third to £2.5bn.

Throw in a £309m provision for expected contract losses, £1.1bn of Covid-19-related asset writedowns and £366m in restructuring charges, and Rolls swung to a £1.8bn statutory operating loss – that is versus £83m of profit a year earlier. Pre-tax profit was further weighed down by a £2.6bn revaluation of its US dollar hedge book.

Those restructuring costs came as the group reorganises its civil aerospace business for a “smaller mid-term market” – this includes cutting around a third of its workforce. Aiming to make £1.3bn of annualised savings by the end of 2022, this will cost £800m to deliver.

Amid the collapse in EFH, Rolls saw a £2.8bn underlying free cash outflow in the first half. This was also pulled down by a £300m increase in inventory as plane makers cut production schedules and a £1.1bn hit from halting ‘invoice factoring’ – this is where trade receivables are sold to banks who go on to recoup the money owed from suppliers so that Rolls can receive cash more quickly. The group is pointing to a £4bn free cash outflow for the full year, although aims to generate £750m of annual free cash flow from 2022.

Meanwhile, excluding £2.3bn in lease liabilities, Rolls finished the half with £1.7bn of net debt and is guiding that this will reach £3.5bn by the year end. It also expects net debt will have “significantly increased” by the end of 2021. The group has £3.2bn of debt maturing between now and the end of next year.

Having finalised a new £2bn term-loan facility in August, Rolls is sitting on £8.1bn of liquidity. But as expected, it is now looking to raise money through disposals of at least £2bn over the next 18 months – including the sale of Spanish subsidiary ITP Aero. There has been much speculation that Rolls will undertake a rights issue to shore up its finances, but the group has remained coy, sticking to the line that it is “reviewing a range of options”. Analysts at JPMorgan believe “only a very major capital raise would put Rolls-Royce on a sound footing.”

Analyst consensus expects an £112m operating loss for the full year, recovering to a £578m profit in 2021.