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Rolls-Royce engine repair costs rise

The aerospace engineer increased its cost estimates for the Trent 1000 engine programme
August 6, 2019

Rolls-Royce’s (RR.) free cash outflow rose to £429m in the first half, significantly above the £72m it posted at its 2018 half-year results. The aerospace engineer experienced higher in-service cash costs for its embattled Trent 1000 engine programme and the “non-recurrence of an unusually high level of aftermarket deposits” in civil aerospace last year.

IC TIP: Sell at 802p

The group is still spending heavily to fix its Trent 1000s, which have been dogged by compressor issues. Rolls increased its in-service cost estimates by £100m across the next three years, recognising that it has failed to reduce the number of aircraft grounded by engine issues as quickly as originally anticipated. The group expects the 2019 full-year impact to now sit around £450m-£500m, before falling by £50m-£100m in 2020 and “stepping down materially thereafter”, with all fixes fully embodied into its Trent 1000 Package B/C fleets by 2022. 

“We expect a significant improvement in cash in the second half as we unwind inventory... and benefit from improved trading,” chief executive Warren East said. The group’s provisions, meanwhile, fell by £242m over the half, largely due to the Trent 1000 disruption (provision taken in 2018) and contract losses, using provisions of £219m and £34m, respectively. 

Rolls-Royce also recognised the cost of the aviation market’s shift from large jumbo jets to more nimble aircraft. Airbus’s decision to cease producing its flagship A380 jet in 2021 meant a reduction to a Trent 900 order agreed with airline Emirates to provide engines and aftercare. Following an exceptional charge of £186m at its full year, Rolls has added an exceptional £59m charge in the period under review, taking total A380-related exceptional costs to £245m. 

On the day prior to the release of Rolls’ results, JPMorgan Cazenove forecast adjusted full-year EPS of 20.7p, rising to 30.8p in 2020.

ROLLS-ROYCE    
ORD PRICE:802pMARKET VALUE:£15.4bn
TOUCH:801.8-802.4p12-MONTH HIGH:1,084pLOW: 741p
DIVIDEND YIELD:1.5%PE RATIO:na
NET ASSET VALUE:*NET CASH:£508m**
Half-year to 30 JunTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)†
20187.49-1.23-51.64.6
20197.88-0.79-48.04.6
% change+5-- 
Ex-div:24 Oct   
Payment:5 Jan   
*Negative shareholders' funds (intangible assets of £5.4bn, or 281p a share) **Does not include lease liabilities of £2.4bn †Distributions made via an issue of 'C' shares.