United States founding father James Madison once quipped that the currency of confidence was worth more than money itself. Long-suffering shareholders in Rolls-Royce must hope the company's breezy self-assurance finally pays off. Chief Executive Warren East has attempted to put a final cost on its troublesome Trent 1000 engine. Given the company's record, investors still have to suspend their past disbelief.
The concept of a "one-off" cost has become something of a recurring theme for Rolls-Royce. Thanks to durability problems and unforeseen charges to Trent 1000 engines, which power Boeing Dreamliner planes, shares in the aerospace engineer have shed more than a fifth of their value over the past two years, underperforming the benchmark Thomson Reuters Europe Industrials Price Return index by 18 percent.
Still, despite reporting an 852 million pound operating loss, East reckons the company can face the future with new-found "conviction". The fact that the red ink was due to 1.4 billion pounds in further Trent 1000 charges was expected. A final, best estimate of the damage totalling 2.4 billion pounds - implying a further 500 million pounds in 2020 and 2021 - suggests the worst is over.
Taken together with stable predicted 2020 revenue and higher operating profit margins across its core aerospace, power and defence divisions, Rolls-Royce should comfortably hit a target of generating 1 billion pounds in free cash flow, a 100 million pound increase on 2019, notwithstanding any potential coronavirus impact. A mid-term target of nearly double that is more demanding, but probably achievable. That's because the proportion of lucrative servicing contracts will increase following record plane engine deliveries, initial sales of which Rolls-Royce generally makes losses on.
All that said, a flat dividend for the fourth year running suggests limits to East's confidence. Investors who sent shares up 6 percent on Friday - in a nosediving wider market - will only sustainably support the company's new-found bullishness if all the positivity turns into hard cash.
Aerospace engineer Rolls-Royce reported a 2019 operating loss of 852 million pounds on February 28, after the cost of tackling durability problems with its Trent 1000 engine offset record engine deliveries. Excluding exceptional charges, the company's underlying operating profit rose 25 percent year on year to 808 million pounds on organic revenue which grew by 7 percent year on year to 15.5 billion pounds.
In November, Rolls-Royce said it would take a 1.4 billion pound one-off charge connected with its Trent 1000 engine, which powers Boeing's 787 Dreamliner aircraft. Airline customers have had to ground the aircraft for Rolls-Royce to carry out repairs. The company added that the coronavirus was likely to hit air traffic growth in the near term, but long-term growth trends remained intact.
Comments
Comments are closed.