A recovery in aviation may have helped aircraft engine maker Rolls-Royce (RR.) so far in 2022 but despite a fairly upbeat trading statement the market remains pretty sceptical on the shares.
In an update ahead of its AGM, Rolls confirmed financial performance had been in line with expectations and kept full year guidance unchanged but it also said it was ‘well positioned’ for growth in its end markets and expected ‘positive momentum’ in trading despite the uncertain macroeconomic backdrop.
After making some initial progress the shares dipped 0.3% to 80.25p - only a smidge above its 52-week low of 77.86p.
In addition to the civil aerospace sector, the company serves the power generation and defence industries.
Rolls confirmed operating margins in its defence arm would be lower thanks to a changing mix of products and increased investment, cash generation from the power business is also taking a hit as the company holds more stock to cope with supply chain challenges.
AIR TRAVEL THE BIG DRIVER
The big driver for the company though is the return of air travel. Rolls is reliant on spares and repairs revenue from its installed base of engines, which in turn is dictated by how long aircraft spend in the air.
The sale of Spanish aero engine and gas turbine manufacturer ITP Aero to private equity firm Bain Capital is expected to complete imminently with the £2 billion proceeds being used to pay down Rolls’ borrowings.
There was no comment on the process to replace current CEO Warren East who is due to step down by the end of this year.
Jefferies analyst Chloe Lemarie commented: ‘The trading update to April is uneventful, which we welcome. Over January to April, engine flight hours are said to be up 42% year-on-year, showing some recovery despite the impact of Omicron. In Defence, the group talks down the short-term uplift potential from Ukraine's invasion, as its business is a long-term one.
‘Power Systems is said to experience strong order intake in the first four months, with the group working to mitigate supply chain disruptions by holding more inventories.’
