It has been a better year for the Rolls-Royce share price after declines in 2020 saw stocks hit an 18-year low.
This year we have seen some kind of recovery, but it was hard won and mostly occurred in the second half of the year, after the company surprised the markets in August with an unexpected profit of £ 393million in the first. semester, exceeding consensus expectations of a small loss.
This was helped by a better than expected £ 600million improvement in free cash flow, which, although still negative at -1.17 billion pounds, was still a significant improvement a year ago. year.
In the weeks following August, the stock price managed to make decent gains, although recent concerns over the rise in Delta infections and lately Omicron have seen stocks retreat from their highs of November above 150p.
Rolls-Royce has taken significant steps over the past 12 months to reduce staff and costs and this morning reiterated that it is on the right track with £ 1.3bn in additional annualized costs.
While all of this is welcome, the reality remains that the company still relies heavily for a good portion of its annual revenue on civil aviation engine flight hours (EFH), and although these have improved, with the return of transatlantic travel helping as well, the company is still expected to be below its annual target of 55% of 2019 levels for 2021.
Nonetheless, today’s third quarter update showed that things are moving in the right direction, with the £ 1.9bn deal with the Pentagon for its F-130 engines that will be used to propel the B-52 Stratofortress over the next 30 years was a win. The company also said its cash flow turned positive in the third quarter, so free cash outflow for 2021 would likely be lower than previous forecast by £ 2 billion.
Large Engine Flight Hours (EFH), which in the first four months of this year were 40% of 2019 levels, continued to increase and fell by 43% in the last two months of the first half of the year. at 50% of 2019 levels in the third quarter, which places full hours at 46%, therefore still below the 55% targeted at the start of the year.
This is not entirely surprising given what is happening with the Delta variant across Europe and lately Omicron, as restrictions tighten as Christmas approaches.
International travel is expected to remain a headwind, particularly as next year approaches, with all of the various restrictions imposed by governments unlikely to be significantly relaxed until early 2022.
On the positive side, the balance sheet is in better shape thanks to the £ 2bn of divestments announced in recent months, including the divestment of ITP Aero for € 1.7bn which should be finalized in the first half of next year.
Its Small Modular Reactor (SMR) business is also gaining traction after the government invests £ 210million in addition to £ 145million in private investment as the company steps up its contribution to the UK economy’s transition. towards reducing its carbon production.
Regarding its full year outlook, the company said it is progressing well and has been successful in meeting its goal of becoming positive free cash flow by the end of the year, at least for a quarter. in any case.
Now they have to do this on a regular basis and although they are likely to be lower than the previously guided £ 2billion cash outflows for this year, they still have a ways to go to meet their goal of being positive in the FCF of £ 750million by the end of 2022.
Much will depend on when and when international travel returns to normal and it remains a big question if they are to meet EFH expectations exceeding 80% of 2019 levels in 2022.
Overall, today’s update is broadly positive as other areas of business away from civil aviation move in the right direction, however, investors appear unable to overcome concerns. regarding the return of international travel, stocks having fallen at the start Trade.