ii view: confident Rolls-Royce to restore dividend

First-half results to 30 June

• Adjusted revenue up 18% to £8.18 billion
• Adjusted operating profit of £1.15 billion, up from £673 million in H1 2023
• Net debt of £822 million, down from £1.95 billion in late December

Guidance:

• Now expects full-year 2024 operating profit of between £2.1 billion and £2.3 billion, up from a previous £1.7 billion and £2 billion
• Now expects to recommence and declare a 2024 dividend payment as of its February 2025 results announcement

Chief executive Tufan Erginbilgic said: “Our transformation of Rolls-Royce into a high-performing, competitive, resilient, and growing business is proceeding with pace and intensity. We are expanding the earnings and cash potential of the business in a challenging supply-chain environment, which we are proactively managing. We are on track to deliver our mid-term targets.

“Our strong first-half results reflect the continued delivery of our strategic initiatives and a relentless focus on commercial optimisation and cost efficiencies across the group. These results and our increased financial resilience give us the confidence to raise our 2024 guidance and reinstate shareholder distributions in respect of the full year 2024 results.”

• Invest with ii: Top UK Shares | How to Start Trading Stocks | Open a Trading Account

ii round-up:

Rolls-Royce Holdings (LSE:RR.) operates across the three core divisions of civil aerospace, defence, and power systems. 

It has customers in over 150 countries, comprising more than 400 airlines and leasing customers, 160 armed forces and navies, and over 5,000 power and nuclear customers. 

During this latest period, Civil Aerospace generated its biggest slice of profits at 58%, followed by Defence at 27%, and Power systems the balance of 15%. 

For a round-up of these latest results announced on 1 August, please click here. 

ii view:

Rolls-Royce large civil aerospace engines today total over 4,800, powering four out of every five new generation widebody aircraft. Its military engines power over 16,000 planes, helicopters, and submarines, with its power systems division selling around 20,000 reciprocating engines annually for marine and industrial applications. A small New Markets division is focused on opportunities for the transition to net zero, such as developing small, low-cost nuclear reactors and hydrogen-powered engines. 

For investors, geopolitical tensions in the Middle East and Ukraine could yet escalate, potentially disrupting the group’s airline customers. Large engine flying hours - Rolls is paid by airlines depending on how many hours its engines fly - are now forecast to reach 101% of their pre-pandemic 2019 level for the full year 2024, as opposed to a previous 110%. Supply chain disruption, recently flagged by aircraft maker Airbus, remains a challenge, while costs generally for businesses are now elevated.  

• Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis
• The two shares star investor Bill Ackman has snapped up
• Rolls-Royce shares break record on results and dividend joy

On the upside, a recovery for civil aerospace following the pandemic now combines with increased demand for defence provision given raised geopolitical tensions. The company remains on track to achieve up to £500 million of cost savings over the medium term. Group net debt continues to fall, while management is now promising to restart the dividend with a payout equivalent to 30% of post-tax underlying profit and leaving the shares sat on an estimated income yield of around 1%. 

In all, Rolls-Royce shares have come a long way having traded in late 2022 at under 100p per share. That said, trading momentum and management initiatives looks to remain in its favour, arguably giving investors room to remain cautiously optimistic. 

Positives: 

• Investing in climate change-related product innovation
• Reducing net debt

Negatives:

• Uncertain geopolitical outlook
• Supply-chain challenges

The average rating of stock market analysts:

Buy