ii view: new Rolls-Royce chief looks to power change

Recovering airline customers, a new business shake-up and investing in energy transition products. We assess prospects. 

Full-year results to 31 December

• Adjusted sales up 16% to £12.7 billion
• Adjusted operating profit up 58% to £652 million
• Net debt down 37% to £3.3 billion
• No dividend payment

Guidance:

• Expects full-year 2023 operating profit of between £800 million and £1 billion

Chief executive Tufan Erginbilgic said: 

"It is an honour to lead Rolls-Royce, one of the world's most trusted brands and a business with strong positions in growing markets. Our people take tremendous pride in our innovation and engineering solutions. Together, we must now move at pace and harness that pride to create a high-performing, growing and competitive business."

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ii round-up:

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

Its more than 11,000 jet engines in service globally power more than 30 different types of commercial aircraft. Its military or defence engines power more than 16,000 jet fighter, helicopters, and naval related vessels, while its Power Systems division makes high-speed diesel engines for marine and industrial applications. 

The FTSE 100 company also operates a recently established New Markets division, with both small low-cost nuclear reactors and hydrogen powered engines under development given the need for energy transition under climate change concerns. 

For a round-up of these latest results announced on 23 February, please click here. 

ii view:

Tracing its history back to 1906, Rolls today employs over 40,000 people with customers in more than 150 countries. Its Civil Aerospace division generates its biggest slice of revenues at around 44%, followed by Defence at 29%, Power systems at 26% and New Markets the small balance. Its products are used by more than 400 airlines and leasing customers such as International Consolidated Airlines Group SA (LSE:IAG), 160 armed forces and navies, and over 5,000 power and nuclear customers.

Strategic pushes under its new chief executive include simplifying the business, increasing efficiency, potentially via further cost cuts, and injecting new vigour into its culture. A review of investment opportunities going forward will also be carried out, with its New Markets business likely to come under the microscope. 

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For investors, high economic uncertainty including potential further interest rate rises cannot be ignored. Volatility for its biggest arena of customers, airlines, continues to warrant consideration, as do still elevated costs for businesses generally and concerns for climate change given the ongoing use of fossil fuels across the aviation industry. Finally, a need to improve its credit rating leaves the dividend payment still halted. 

On the upside, a recovery from the pandemic for its airline customers has helped buoy performance, with demand for defence products robust given high geopolitical tensions. A new transformation programme under its latest chief executive offers promise, while the reduction in net debt looks to move the company at least a step nearer to restoring the dividend payment.  

For now, and while an improved outlook and renewed strategic shake-up offer optimism, a share price comfortably above the consensus analyst estimate of fair value at 105p per share, looks to leave the shares up with events. 

Positives: 

• New CEO initiatives  
• Investing in climate change related product innovation

Negatives:

• Highly uncertain economic outlook
• Dividend payment suspended

The average rating of stock market analysts:

Hold