ii view: Rolls Royce cancels dividend but shares up 18%

Rolls shares had dived by nearly 60% year-to-date, but what should investors make of this news?

Covid-19 update

• Withdrawing previous financial guidance for 2020
• Drawn fully on a £2.5 billion revolving credit facility
• Gross cash balance of £5.2 billion
• Cancelling final dividend payment of 7.1p per share

Chief executive Warren East said:

"We find ourselves in unprecedented times, both as a company and as a key player in vital power markets across the world. Our priority is to do everything we can to safeguard the lives and livelihoods of our people and to play our part in helping our customers, partners and communities. 

“We are taking significant measures to strengthen the operational and financial resilience of our business. I would like to thank all our 52,000 colleagues worldwide for their support, dedication and hard work at this time when difficult decisions are being made."

ii round-up:

Aircraft engine maker Rolls-Royce (LSE:RR.) today scrapped its dividend payment and withdrew full-year 2020 financial estimates as it battles with Covid-19.

Rolls is paid by its airline customers depending on how many hours they fly. With airlines such as International Consolidated Airlines Group (LSE:IAG) or easyJet (LSE:EZJ) either reducing flights to a trickle or completely grounding their fleet, widebody flying hours fell by around 50% in March and are expected to fall further in April and beyond. 

The financial hit to date has been in the region of £300 million.

Rolls-Royce shares bounced by over 18% in early UK trading, having more than halved over the year-to-date. Airbus (EURONEXT:AIR) and Boeing (NYSE:BA), whose planes Rolls engines regularly power, are both down by around 60% during 2020.

Problems impacting its Trent 1000 engines had continued to reduce. 

Away from civil aerospace, its defence business had suffered no material impact from coronavirus, with the UK and US governments declaring it a critical supplier. 

For its power systems division, reduced Chinese and oil & gas customer demand had been partly offset by demand for critical backup power generation. 

Rolls has drawn fully on a £2.5 billion revolving credit facility as a precautionary measure in uncertain times, while executive and senior manager salaries are being reduced by 20% for the rest of 2020 under cash conservation measures.

ii view:

Under former ARM chief executive, Warren East, Rolls Royce has been looking to simplify and restructure to better position itself going forward. Disposals of Commercial Marine and Power Development businesses were previously completed.

The civil aerospace engine business accounts for just over half of group sales. Rolls makes an initial loss on the delivery of each engine and aims to make a profit in the longer-term by including maintenance contracts. Covid-19 is now hitting its return from engine flight time and required repair. 

For investors, progress in restructuring the company prior to Covid-19 has been seen. As a supplier to the volatile airline industry, Rolls is experienced in dealing with the ebbs and flows. A business model geared towards aftersales has long been established, but now those aftersales are being pressured. Cash liquidity soon to total £6.7 billion and measures to conserve cash offer some reassurance. But, for now, with the timing of any return to normal service for the airline industry impossible to predict, more cautious investors will likely adopt a wait and see approach. 

Positives: 

• Diversity of product and geographical end-markets
• Cost saving restructuring plan being executed

Negatives:

• Exposure to the volatile airline industry
• Final dividend payment cancelled

The average rating of stock market analysts:

Strong hold