Rolls-Royce Holdings PLC (LSE:RR.) surprised investors with hefty guidance upgrades in early results on Wednesday morning, leaving analysts hailing the company’s quick turnaround this year.
A post-Covid boom for the aviation sector, alongside ramped-up defence spending in the wake of the Ukraine war, helped the FTSE 100-firm to first-half profits of between £660mln and £680mln and free cash flow of £340mln to £360mln – both way above consensus estimates.
Given chief executive Tufan Erginbilgic’s comments in January likening the company to a “burning platform,” analysts flocked to hail the new boss’s work since joining early this year.
“Things couldn’t be going much better for CEO Tufan Erginbilgic,” interactive investor analyst Victoria Scholar commented.
“His transformation plan across divisions is clearly bearing fruit with a sharp improvement in its operations.”
Dwelling on the fact the transition plan was only in its early stages, Shore Capital tipped Rolls-Royce could offer further good news this year, reiterating the stock on its ‘buy’ list.
“There remains several other catalysts for the stock,” analysts said, including from further strategy updates, but also the UK’s pursual of small modular reactor technology.
Aside from Rolls’ repeated mention of growing ‘cost efficiency,’ stronger ‘pricing action’ and ‘commercial improvements' - which analysts agreed already seem to be paying off - external factors also played a part.
“The company is benefiting from a recovery in flying hours by the airline industry,” Hargreaves Lansdown Steve Clayton explained.
“[This] is pushing more aircraft into the workshops for engine overhauls” – likely welcome news for the firm given payments are based on flying hours and engine servicing.
Rolls itself anticipated engine flying hours during the first six months of the year had hit 83% of pre-pandemic levels.
“Increased pricing” and “collection of overdue debts,” alongside more flying, means Rolls expects to have brought in £700mln from such contracts alone during the half year, up 62%.
Across civil aerospace operations, Rolls tipped this had boosted cash flow, helping profits from the department hit £400mln, following a £79mln loss in early 2022.
On the negatives, Clayton delved into Rolls’ increased working capital, though again this was based on the group holding “higher inventory to cover the additional activity levels,” he said.
According to the company, working capital will account for £600mln of first-half outflows, with constrained supply chains also playing a part.
Rolls raised profit and cash flow guidance by up to £400mln and £200mln respectively on the results, now expecting the full-year figures to sit around £1.4bn and £1.0bn each.
Shares soared on the news, rising 20% to 182.8p come Wednesday afternoon.