viewRolls-Royce Holdings PLC

Rolls-Royce soars as it enjoys "good end" to year but Trent 1000 issues continue

The engine maker said the coronavirus outbreak was “likely to have an impact” on air traffic growth but its guidance for 2020 excludes any material impact

Rolls-Royce Holdings PLC -

Rolls-Royce Holdings PLC (LON:RR.) was a sole blue-chip gainer on Friday, bucking the coronavius dominated market slump as the engines maker reported 25% growth in underlying profits to £808mln for 2019 as it enjoyed a stronger finish to the year and eked out more cost savings. 

However, the FTSE 100-listed firm remained loss-making at the reported level, though pre-tax losses more than halved to £891mln, as troubles continued to dog its Trent 1000 civil aerospace engine.  

An exceptional programme charge of £1.4bn was taken in the year, which was announced in November and has not changed, with in-service cash costs for the Trent 1000 of £578mln for the year and expected to be £450-550mln in 2020.

The “last major issue to resolve” with the engine, on a high-pressure turbine blade, was said to be on track for the first half of 2021.

“After a challenging first half, we had a good end to 2019,” said chief executive Warren East, hailing improved restructuring efforts, run-rate cost savings of £269mln and an improved profit for the Civil Aerospace arm. 

“We remain on target to reduce aircraft on ground to single digits by the end of Q2 2020.”

Looking forward, the company said the outbreak of the COVID-19 coronavirus was “likely to have an impact” on air traffic growth in the near term.

But East said: “The situation is still evolving, and as such our guidance for 2020 excludes any material impact. We are monitoring developments, taking mitigating actions, and will update the market as appropriate.”

The year ahead should see core operating profit growth of around 15%, with at least £1bn of free cash flow in 2020 on the path to East’s target of almost doubling this level to exceed £1 per share of free cash flow in the mid-term.

Rolls-Royce reported a net cash position up £0.5bn to £1.4bn and kept its 'payment' per share, not dividend, steady at 11.7p.

Going in the right direction

Sophie Lund Yates, equity analyst at Hargreaves Lansdown commented: "Issues with the Trent 1000 engines are a blot on Rolls’ copy book, but full year results have landed well.

"We’re also seeing better trends in the group’s largest division, Civil Aerospace. The group makes a lot of its money from servicing its engines and not just from making them. Services revenue rose nicely in 2019, and there was also a record delivery of engines used for bigger, long-haul commercial planes.

"Free cash flow has been under the spotlight too. Cash generation hasn’t always been the smoothest, and we like the focus on improving this side of things. The group’s still some way off its mid-term target of at least £1.9bn in free cash, but with £1bn being targeted in 2020 things are definitely heading in the right direction."

She added: "Unsurprisingly Rolls Royce is monitoring coronavirus closely. Any major disruptions to travel trends would have an impact on the group, but right now it’s simply not possible to say what will happen.”

In afternoon trading, Rolls-Royce shares were 5.9% higher at 636.20p.

 -- Adds analyst comment, share price --

Quick facts: Rolls-Royce Holdings PLC

Price: 340.6 GBX

Market: LSE
Market Cap: £6.58 billion

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