Rolls Royce (RR Stock) share price slides as CEO East set to depart

The Rolls Royce share price has struggled over the last 12 months as it continues to be buffeted by the ebb and flow of the pandemic, and the travails of the travel sector, although it has still managed to recover well from the dark days of the October 2020 lows, when it traded as low as 34.70p.

Since then, the share price has more than trebled, however over the last six months the shares have traded choppily between peaks of 150p back in November last year, and finding an element of buying interest just above the 100p area, with technical resistance just above the 200-day MA.

To its credit the company has taken significant steps in the last 12 months to reduce headcount, cut costs and improve its cash flow, and expressed optimism that it would be able to cut a further £1.3bn this year.

In the first half of this year the various measures taken to bolster the finances saw an unexpected H1 profit of £393m, however despite efforts to diversify its business model, it still remains heavily reliant on civil aviation engine flying hours (EFH), for a good proportion of its income.

The return of transatlantic travel will have no doubt helped towards the end of last year, however the impact of Omicron restrictions couldn’t have come at a worse time, which means the company missed its full year target of 55% of 2019 levels for 2021, although today’s numbers have shown that EFH did manage to see 57% in the second half of this year, which could be described as a small victory.  

There have been some good wins on the defence side of the business in recent months with the £1.9bn deal with the Pentagon for its F-130 engines, which will be used to power the B-52 Stratofortress for the next 30 years.

The company said it became cash flow positive in Q3 with the result that free cash outflow for 2021 was likely to be less than £2bn previous guidance.

Today’s full year numbers have seen Rolls Royce eke out a tiny profit of £10m, after last year’s £3.1bn loss.. However this news has been overshadowed by the announcement that CEO Warren East is stepping down at the end of 2022, after eight years in the top job. This is a huge blow for the business in a key stage of the turnaround process.

East was a key component in the turnaround plan seen at the beginning of his tenure, and has been at the forefront of this latest one. The last thing the business needs in choppy waters is for the captain of the ship to leave his post.

On the numbers, underlying revenues from continuing operations came in at £10.9bn, generating an underlying operating profit of £414m. Free cash flow has improved but was still negative to the tune of £1.44bn, with net debt rising to £5.16bn.

The balance sheet is in better shape due to the £2bn of disposals announced in the last few months, including the sale of ITP Aero for €1.7bn which is expected to complete in the first half of this year.

The Small Modular Reactor (SMR) business is also gaining traction after the government put in £210m on top of £145m of private investment as the company ramps up its contribution to the UK economy’s transition to cutting its carbon output.

This business diversification continued in December with a £85m deal with Qatar to build new low carbon nuclear power units.

In its civil aerospace unit Rolls Royce managed to obtain 58 engine orders for the Airbus A350 freighter, as underlying revenues came in at £4.5bn, a decline of 10% on last year. Underlying losses in the unit were reduced to £172m.  

It also announced that the company’s Power Systems unit is developing MTU engines that would be able to use eco-friendly methanol fuel for shipping, as the embattled UK company looks to diversify further away from its core business, which is still civil aviation.