12th May 2022 11:34
(Alliance News) - Rolls-Royce Holdings PLC shares were not getting much of a bump on Thursday, after suffering a torrid time in recent history, despite the jet engine maker's rather promising shareholder update.
Shares in Roll were down 0.2% in London on Thursday mid-morning at 80.34 pence, giving back the 3.4% gain seen earlier in the session. In 2022 so far, the shares are down a whopping 35%.
Victoria Scholar, head of Investment at interactive investor, said: "Rolls-Royce said trading was in line was expectations in the first four months of the year and kept its full-year guidance unchanged thanks to the post-pandemic return to the skies combined with increased government defence spending.
"The engine maker said it is working closely to limit supply chain disruptions and has increased inventories to help mitigate raw material inflation. As previously stated, Rolls-Royce confirmed that its operating margin will be lower this year than last."
The London-based jet engine maker said it is well positioned for anticipated growth in its end markets and continues to expect positive momentum in its financial performance despite ongoing macroeconomic risks.
In the Civil Aerospace business, Rolls-Royce's large engine long-term service agreement flying hours for the first four months of 2022 were 42% higher year-on-year, as passenger demand recovers on routes where travel restrictions have been in lifted, such as in Europe and the Americas.
Scholar said the positive news is a "welcome reprieve for shareholders".
Laura Hoy, equity analyst at Hargreaves Lansdown, added: "Rolls-Royce hasn't been able to catch a break over the past few years, but we're finally starting to see green shoots amid a budding recovery. The recovery in engine flying hours is continuing to build, though the ever-changing state of affairs in China means getting back to pre-pandemic levels is still some way off. Still, the resumption of air travel is a net positive for the new, leaner business. It's encouraging to see new orders coming through the pipelines as airlines work to build up capacity and pounce on a travel-hungry public."
Meanwhile, the group's Defence business has a strong order backlog, giving the group confidence on revenue, profit and cash conversion, even with the headwinds of inflation and supply chain risk. However, operating margin is set to be lower for the year, reflecting original equipment and aftermarket mix changes and a planned rise in investments.
Hoy continued: "The Defense business continues to be a beacon of strength, and although it comes at the expense of near-term profits, it's the right move to continue investing in future growth. Progress in New Business is also reassuring and the UK government's commitment to nuclear energy should mean there are some new contracts up for grabs on the horizon."
In addition, the Power Systems segment reported strong order intake across the business, particularly in power generation and defence end markets.
Looking ahead, for the medium term Rolls-Royce expects Civil Aerospace's underlying revenue to grow at a low double-digit percentage from 2021, with an operating margin percentage in the high single digits.
"We are confident that we have positioned the business to achieve positive profit and cash this year, driven by the benefits of our cost reductions and increased engine flying hours in Civil Aerospace together with a strong performance in Defence and Power Systems, and balanced by our commitment to invest in technology and systems that are critical to the leading sustainable solutions we are delivering now and in the future," said Chief Executive Warren East.
HL's Hoy said the biggest thing to keep an eye on with Rolls is cash flow, which the company has guided to be in the black by year-end.
"This is a key turning point for Rolls, which has seen its debt pile balloon as billions walk out the door to keep operations turning over. The GBP2 billion sale of ITP Aero will help get this under control, but ultimately we'll need to see a business capable of standing on its own two legs before popping the champagne," she continued.
ii's Scholar added: "The stock has had a torrid time lately, slumping in April after JPMorgan cut it from neutral to sell, accelerating recent losses with shares down by nearly 50% since the peak in September last year. This is a company that was hit hard during the pandemic but now Rolls-Royce faces fresh challenges from its leadership uncertainty after CEO Warren East announced plans to leave combined with the slow recovery of civil aerospace flying hours which are both weighing on the business."
Rolls-Royce will publish its interim results on August 4.
By Paul McGowan; [email protected]
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