Aero-engineer Rolls-Royce (RR.) slashed its annual losses as it continued to work through a sweeping restructuring plan and recover from faulty aircraft engine problems.

The FTSE 100 company still reported significant pre-tax losses for the year through to 31 December 2019, toting up to £891m, but that is a huge improvement on the monster deficit in 2018 when it ran-up losses of £2.95bn. Revenue rose 5% to £16.59bn and underlying ‘core’ operating profit rose 25% to £810m.

Rolls-Royce had to write-off £1.4bn in exceptional charges in its full year results, which off-set the fact the increase in underlying core operating profit.

Rolls-Royce kept its dividend steady at 11.7p per share.

HUGE CHALLENGES FACED

‘After a challenging first half, we had a good end to 2019, delivering 25% growth in full year underlying operating profit and an encouraging level of free cash flow’, said chief executive Warren East.

‘Our restructuring efforts gained momentum, with run-rate cost savings of £269m.’

‘Full year numbers from aircraft engine maker Rolls-Royce got a champagne reception from the market on a day when the FTSE 100 again fell’, said Russ mould, investment director of platform AJ Bell.

At 11am, Rolls-Royce was the only riser across the entire FTSE 100 rallying close on 7% to 641p. However, that is roughly a third lower than the 950p levels at which the stock began 2019.

East said the company had made ground fixing problems in its Trent 1000 aircraft engines and remained on target to reduce aircraft on the ground to single digits by the end of June.

Design glitches on the Trent 1000 engine have meant millions have been put aside for repairs, causing a number of Boeing’s popular 787 Dreamliners to be grounded, damaging the longstanding relationship between the companies and losing it major contracts.

FREE CASH FLOW TARGETS STAY

Core operating profit growth is expected to be around 15%, the company said, with at least £1bn of free cash flow (FCF) in 2020, as Rolls’ drives towards its ambitious £1 per share of FCF, or at least £1.9bn, in the mid-term.

‘Unlike the airlines, which operate on a very short time-frame based on flight demand, orders for new planes are a much more long-term proposition’, said AJ Bell’s Russ Mould.

‘As Rolls points out, the long-term growth dynamics in this market remain intact for now.’

The strong performance of its aftermarket business will also bolster investor confidence after a spate of damaging profit warnings in the last decade. As one of the world’s top aircraft engine-makers it earns a lot of money from the aftermarket, proving maintenance, spares and repairs.

‘The company has a significant installed base of engines which fall under its total care management package and the recurring revenue from this activity helps underpin earnings visibility’, said Mould.

KNOWN UNKNOWNS

However near-term execution risks remain, while Rolls remains largely in the dark about any possible impact of the COVID-19 outbreak.

‘The situation is still evolving, and as such our guidance for 2020 excludes any material impact’, said Rolls today. ‘We are monitoring developments, taking mitigating actions, and will update the market as appropriate.’

 

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Issue Date: 28 Feb 2020