Rolls-Royce – Tailwinds Make For Smoother Liftoff Into Recovery

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A recovery in air travel in Europe and the Americas meant large engine flying hours in the four months to May were 42% higher than last year.

As expected, Rolls-Royce Holding PLC (LON:RR)’s operating margins in Defence will be lower reflecting a changing mix of products and increased investment. Power Systems cash conversion is also expected to be weaker, as previously guided, due to changes in inventory management to cope with supply chain issues.

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The sale of ITP Aero is expected to complete in the first half of this year, and should generate around £2bn which will be used to repay debt.

Trading so far this year has been in line with expectations and guidance remains unchanged.

Shares were up 2.4% following the announcement.

Rolls Royce Can't Catch A Break

Laura Hoy, Equity Analyst at Hargreaves Lansdown:

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.

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.

The biggest thing on our minds is cash flow, which management still expects 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 £2bn 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.”

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