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Rolls-Royce dumps dividend as aircraft maintenance activity slumps

The engine maker had gross cash of £5.2bn as of the end of March

Rolls-Royce Holdings PLC -

Rolls-Royce Holdings PLC (LON:RR.) added its name to the coronavirus dividend dump as the engine maker faces an unprecedented cratering of aircraft engine aftermarket sales due to the pandemic.

The primary impact from coronavirus has been on engine flying hours in its civil aerospace business as many airlines have now grounded their entire fleets, with flying hours of widebody aircraft falling roughly 25% in the first quarter, 50% in March and further deterioration expected in April and beyond.

READ: Rolls-Royce downgraded as UBS sees aftermarket as 'most impacted' by coronavirus

Coronavirus has been the cause of a "headwind" of roughly £300mln to liquidity in the last six weeks of the first quarter, the company said.

It has begun to prepare for an anticipated reduction in engine delivery and maintenance, repair and overhaul volumes, having kept its output of new widebody engines broadly stable in the quarter, as aeroplane manufacturers maintained production levels.

Reassuringly for the FTSE 100 company, which is part of the VentilatorChallengeUK consortium working to increase the UK's supply of ventilators, its defence business has seen “no material operational or financial disruption” from the virus in the first quarter as US and UK governments both designated it a critical supplier.

Furthermore, the larger Power Systems arm has been “relatively resilient” as reduced demand from China and from oil and gas customers was partly offset by demand for critical backup power generation. However, it is expected to be hit by reduced economic activity in the rest of the year, particularly in industrial markets

Another upside is that engineers have been getting on top of the recent costly technical issues that have affected the Trent 1000 engine, with "mid-20s" aircraft on the ground at the end of March, down from mid-30s reported at the end of February and expected to be reduced to single digits by the end of the second quarter.

Rolls-Royce had gross cash of £5.2bn as of the end of March, after fully drawing down a £2.5bn borrowing facility and will increase total liquidity to £6.7bn after agreeing another £1.5bn facility with a consortium of banks.

Withdrawing its final dividend for 2019 “in light of the uncertain macro outlook”, will save £137mln, while other operational savings are expected to have a cash flow benefit of £750mln in 2020.

Shares in the company climbed 15% to 290.2p on Monday morning, still down around 57% in the year to date. 

“The big challenge for Rolls-Royce," said analysts at AJ Bell, "is addressing its reliance on maintenance and repair revenue from its installed base of aircraft engines.

“If planes are being flown less, demand for these services will reduce dramatically and it remains to be seen what the long-term impact of coronavirus will be on the aviation industry."

Analysts at the Share Centre said investors will be pleased the company is getting on top of the long-running issues with the Trent engine, and also that defence activity has not been affected by Covid-19 yet.

"However, there were few other positives for investors in this update. Before the coronavirus outbreak there were signs of improvement thanks to the efforts of CEO Warren East, but with the current grounding of so many commercial jets, for what may be an extended period, the short-term outlook remains difficult."

    --Adds share price and broker comment--

Quick facts: Rolls-Royce Holdings PLC

Price: 271.6 GBX

LSE:RR.
Market: LSE
Market Cap: £5.24 billion
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