11th May 2023 10:35
(Alliance News) - There was nothing demonstrably bearish from Rolls-Royce Holdings PLC's latest update on Thursday, though its stock struggled amid some investor profit taking after a strong run, and perhaps some disappointment after no guidance boost.
Rolls-Royce shares were 3.9% lower at 150.25 pence each in London on Thursday morning. Shares are up 52% year-to-date.
The developer of power and propulsion systems, including jet engines and nuclear reactors, said its transformation under new Chief Executive Officer Tufan Erginbilgic is picking up pace.
Erginbilgic, installed as CEO at the start of the year, said the company's performance was "in line with our expectations" in the four months ended April.
In Civil Aerospace, Rolls-Royce said it has continued to win new deals, though it added "supply chain management remains a key operational challenge" in the unit in particular.
Power Systems has enjoyed revenue growth, "driven by demand for aftermarket services and exceptionally high order intake in the prior year".
"In Defence, we continued our successful run of key programme awards with the announcement that the AUKUS submarine programme will be powered by Rolls-Royce nuclear reactors," Rolls-Royce said.
Rolls-Royce backed its underlying operating profit guidance range of GBP800 million to GBP1.0 billion for 2023, and maintained its free cash flow guidance of GBP600 million to GBP800 million.
In 2022, operating profit was GBP837 million. Underlying free cash flow was GBP505 million.
The lack of a guidance bump may have been a let-down, with expectations high, CMC Markets analyst Michael Hewson suggested.
"While there may be some disappointment that Rolls-Royce has left its guidance unchanged, everything that we've seen in today's trading update appears to suggest that the company appears to be ahead of schedule, in its recent recovery. With the share price still well below the levels it was pre-Covid, the results from Melrose Industries GKN operation yesterday suggest that civil aerospace is on the way back," Hewson commented.
Melrose Industries PLC on Wednesday said it traded materially ahead of expectations in the four months to April 30, with "significant growth in revenue, profit and margin being achieved".
Revenue was 19% higher year-on-year at constant currency, helped by a 28% improvement in its Engines divisions.
AJ Bell analyst Russ Mould said tough-talking Erginbilgic has won over the market. He described as a "burning platform" just days into his stint as CEO. Then in February, it reported well-received annual results.
"Today's trading update saw the first sign of investors taking a tougher line. There was nothing to really frighten the horses. Trading is in line, and the company's key aerospace business is mirroring the recovery in the wider aviation sector to edge back towards pre-pandemic levels," Mould added.
"A fall in the share price may just have represented some profit taking after an exceptionally strong run for the stock, but there were some less than positive hints in the statement. Perhaps most significantly there was nothing on the company's New Markets business – which encompasses its investments in areas like small modular reactors (seen as a cheaper and quicker way of developing nuclear power) and electrical aviation."
Mould added: "Erginbilgic has made a good start in his transformation of Rolls but he still has plenty to do and he will need to demonstrate progress when the group reports its first-half results in August and, again, at an expected update on the turnaround programme later this year."
By Eric Cunha, Alliance News news editor
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