ii view: Rolls-Royce CEO Warren East hands in his notice

It's been a turbulent time at Rolls under Warren East, and the new chief will be kept busy. Buy, sell, or hold?

Full-year results to 31 December 2021

• Revenue down 2% to £11.2 billion
• Operating profit of £513 million, up from a loss of £1.97 billion in 2020
• No dividend payment
• Chief executive stepping down

Full-year 2022 guidance:

• Expects low-to-mid-single digit revenue growth
• Expects operating profit margin to be broadly unchanged

Chief executive Warren East said: 

“We have improved our financial and operational performance, continued to deliver on our commitments and created a better balanced business capable of sustainable growth. We have achieved the benefits of our restructuring programme a year ahead of schedule, positioning Civil Aerospace to capitalise on increasing international travel. 

“We are continuing to make disciplined investments to develop new and existing technologies, which will enable us to seize the significant commercial opportunity presented by the global energy transition driving sustainable returns."

ii round-up:

Aircraft engine maker Rolls-Royce (LSE:RR.) today posted a return to operating profit as it also confirmed the departure of its chief executive Warren East at the end of 2022. 

Significantly lower costs at its Civil Aerospace business helped drive an annual operating profit of £513 million for 2021, up from a £1.97 billion loss in 2020. The maker of defence equipment and power systems expects full-year 2022 revenue growth in the low-to-mid-single digit region, shy of City hopes of nearer to 10%. 

Against a backdrop of intense geopolitical tensions as events in Ukraine escalated, Rolls-Royce shares fell by more than 10% in UK trading. Shares for Central European airline Wizz Air (LSE:WIZZ) fell by more than 7%, while cruise operator Carnival (LSE:CCL) retreated by around 5%. The price of oil smashed above $100 per barrel. 

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

East is leaving the company after leading the engine maker for eight years during one of the most turbulent periods in its history. 

Three of the four business sales agreed over 2021, made to strengthen its balance sheet, have subsequently completed, with the fourth and largest due to get over the line in the first half of 2022. Around £2 billion of sale proceeds will be used to help reduce debt.   

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Cost savings of over £1 billion were achieved during the year, one year ahead of schedule. Management expects the operating profit margin over the full-year 2022 to be broadly unchanged. 

The company’s Annual General Meeting (AGM) is scheduled for 12 May. 

ii view:

Civil aerospace generated Rolls-Royce’s biggest slug of sales at around two-fifths in this latest financial year. Rolls is paid by its commercial airline customers depending on how many hours its engines fly. Next came Defence with sales at just under a third, with the balance largely generated by its power systems business. A new business or New Markets division aimed at energy transition under climate change and currently accounting for under 1% of sales has also been established. 

For investors, pandemic related outlook uncertainty now combines with high geopolitical tensions given the situation in the Ukraine. Flight disruption across the region is in prospect. The dividend remains halted, while finding a CEO replacement will occupy management’s time. In addition, the direction of required climate change transition using decarbonised energies for many of its transport related customers has also yet to be established. 

On the upside, a significant strengthening of its finances is almost complete. Some recovery for its commercial airline customers has been seen, while its other businesses such as defence continue to offer some counterbalance. For now, and with management self-help sat opposite considerable outlook uncertainty, investors may decide to take a ‘wait and see’ approach for now. 

Positives: 

• Strengthening its finances 
• Ongoing cost saving programme

Negatives:

• A cocktail of pandemic, geopolitical and economic outlook uncertainty
• Dividend payment suspended

The average rating of stock market analysts:

Hold