ii view: Rolls-Royce wins B-52 contract and sells ITP

Winning new business and agreeing a major business sale. Buy, sell or hold?

Engine contract win and sale of ITP business

North America chief executive Tom Bell said:  

"We are proud to join a truly iconic U.S. Air Force program and provide world-class, American-made engines that will power its missions for the next 30 years. The F130 is a proven, efficient, modern engine that is the perfect fit for the B-52."

ii round-up:

Engine maker Rolls-Royce (LSE:RR.) today announced a $2.6 billion (£1.9 billion) contract to supply the US Air Force’s iconic B-52 bomber fleet with engines and parts for the next 30 years. 

Around 650 F130 engines will be built and tested at its North American Indianapolis manufacturing plant following its recent $600 million modernise investment. 

Rolls-Royce shares gained by more than 10% in UK trading to an 18-month high as the company continued to navigate headwinds from the global pandemic crisis. Rolls is paid by its commercial airline customers depending on how many hours its engines fly.

Rolls beat fellow engine maker General Electric (NYSE:GE) and current supplier Pratt & Whitney in winning the deal which will create 150 new jobs at its Indianapolis plant.

The aircraft engine maker also confirmed later in the day that it had agreed to sell  its Spanish turbine blade-maker ITP for €1.7 billion (£1.5 billion) to private equity firm Bain Capital. The sale is part of Rolls' disposal programme, announced in August 2020, to raise proceeds of at least £2 billion. 

Rolls recently sold its stake in the RAF’s Airtanker holdings for £189 million in tandem with fellow partner Babcock International (LSE:BAB).

Both announcements follow the US government’s recent decision to open its borders to vaccinated individuals, widening the scope for Roll’s airline customers to operate more long-haul flights. 

ii view:

Rolls-Royce operates across the three divisions of civil aerospace, power systems and defence. In 2019, civil aerospace generated just over half of all sales, power systems just under a quarter and defence the rest. Revenues for its core civil aerospace business fell by 37% over 2020, hit by the grounding of many of its engines. Losses for 2020 mounted to £4 billion compared to a profit of £306 million in 2019.

But first-half results to the end of June, announced in early August, saw it report a surprise profit, despite warning that the pandemic-hit international aviation industry is not set to recover until after 2022. Adjusted operating profit of £307 million contrasted with analysts’ expectations for a loss. The return to profit was aided by aggressive cost cutting and a positive performance by its defence business. 

For investors, pandemic outlook uncertainty remains. Vaccination progress is still to be made in parts of the world and the spread of the Delta variant offers an added worry. But this major defence win offers reassurance. The sale of its ITP business brings it close to its targeted £2 billion business disposal target. Cost savings of £1 billion were on track during 2021 and it hoped to turn cash flow positive during the second half of 2021 as of its recent August interim results. In all, while some caution remains sensible, long-term investors will be greatly encouraged by this double hit of good news.  

Positives: 

• Successfully raised £5 billion 
• Ongoing cost saving programme

Negatives:

• Uncertain outlook due to Covid-19
• Dividend payment suspended

The average rating of stock market analysts:

Hold