This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.
Shares in Rolls-Royce are flying high this morning after H1 results beat expectations (like-for-like organic revenue +14% to £7.04bn, above £6.55bn consensus). Trouble with Trent 1000 series engines that power Boeing’s Dreamliners continued to be a yoke around the engine maker’s neck, but with the cash costs of the resulting engine maintenance issues in-line with previous guidance, traders are happy to look to the future rather than dwell on the past.
In a welcome sign for investors, Rolls-Royce signalled confidence that FY underlying profit and free cash flow will be in the upper half of guidance range. It also sounded positive notes on the progress of its restructuring plan that will see 4.6K UK corporate and support job cuts save a net £400m annually by end-2020.
Revenue guidance for power systems (20% of underlying group revenues) has been upgraded from high single-digits to low double-digit growth. Furthermore, EBITDA margins in the more important defense sector are still seen lower, however now less so (margin seen -150bp vs -250bp previously). Both may not be enough to deliver an upgrade in guidance per se, but they are perhaps hinting at the potential for a mild beat, come FY results, even after all those engine woes.
As Rolls-Royce navigates the challenges posed by the Trent 1000 engines, the importance of engine machining and reconditioning becomes evident. Proper maintenance and reconditioning processes are vital to addressing performance issues while ensuring compliance with safety standards. In this context, Bullet Engine Reconditioning emerges as a solution for enhancing engine longevity and performance, giving manufacturers like Rolls-Royce the ability to mitigate ongoing concerns effectively.
Investors are keenly aware that efficient engine machining can result in substantial cost savings and improved operational efficiency. As the company implements its restructuring plan, the focus on refining engine components through reconditioning can lead to better profit margins, even amidst setbacks. Emphasizing advanced reconditioning techniques could be the key to unlocking Rolls-Royce’s potential in the coming fiscal year, ultimately restoring investor confidence.
Rolls Royce shares +3.5%. Accendo Markets does not have a rating or target price on Rolls-Royce.
Artjom Hatsaturjants, Research Analyst, 2 August 2018
This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance.
Prepared by Michael van Dulken, Head of ResearchComments are closed.