Shares of Rolls-Royce hit an 18-month low ahead of its first-quarter figures in May, but have performed much better since then, albeit within a tight range. Today’s first half figures saw the share price fall again after the company slipped to a loss of £111million.
The various issues related to the resumption of civil air travel have meant that the revenue rebound that was expected in 2022 has been slower to materialize than expected. Nevertheless, long-term flight hours in the first quarter were 42% higher than the same period last year, although this is a fairly low bar.
Rolls-Royce has made progress, but it has been icy as today’s share price reaction seems to indicate.
The company also announced a deal in May with Qantas for 12 Trent XWB-97 engines to power 12 A350s, along with a service agreement for said engines. These engines made in Derby would be so efficient that they could fly non-stop between London and Sydney.
The sale of ITP Aero for £2bn was also completed this week and the proceeds are expected to be used to pay off its debt, which currently stands at £5.14bn.
As we look at today’s first-half numbers, investors will have been looking for progress in its power systems business as it seeks to diversify away from its civil aerospace division which still accounts for the majority of its revenue. . J
Total revenue was £5.3bn, a modest increase on last year, but the company slid to a bigger than expected underlying pre-tax loss of £111m sterling as rising costs impacted margins. Gross margins fell from 21% last year to 17.7%, while funding costs fell from £174m to £236m.
On the face of it, progress is certainly being made in power systems with revenues of £1.37bn, up 20% and comfortably beating expectations. Order intake here was £2.1bn, a 53% increase on the prior period and a record quarter as well.
The defense was disappointing with revenue down 9% to £1.61billion, with the company blaming delays in the timing of the next tranche of the F-35B and falling sales of spare engines.
Civil aerospace, which accounts for the bulk of the company’s revenue, saw an 8% increase in underlying revenue to £2.34bn, with large engine flight hours still at 60% of 2019 levels, and this is expected to reach 70% by the end of the year. and return to pre-pandemic levels in 2024.
The small nuclear reactor project that was announced last year following investment from private and government sources has the potential to be a huge revenue generator, despite significant upfront costs. Rolls-Royce has pre-selected six potential sites for a plant to build such reactors, while the Russian invasion of Ukraine has boosted its defense business.
This New Markets division has so far generated no notable revenue and has seen its operating losses more than double to £48m.
In the first quarter, Rolls-Royce said trading was in line with expectations and maintained that guidance on the basis that commercial activity in civil aerospace will continue to improve.
Overall, today’s first half numbers are disappointing, progress is being made in civil aerospace and electrical systems, but deteriorating margins are concerning and something new CEO Tufan Erginbilgic will need to rein in when he replaces Warren East at the end of the year.
Longer term, there is room for optimism with its New Markets division, but investors seem to be running out of patience, if today’s share price drop is any indication.