Rolls-Royce turnaround continues apace

Last week saw the Rolls-Royce share price soar on the back of a guidance update ahead of today’s H1 numbers, which saw the company raise its estimates for full year underlying profits from between £800m and £1bn, to between £1.2bn and £1.4bn.

Rolls-Royce also said that H1 underlying profit was expected to come in between £660m and £680m.

This morning’s announcement reconfirmed those numbers, while shining a greater light on the underlying business, which looks a completely different beast to the “burning platform” described by incoming CEO Tufan Erginbilgic at the end of last year.

Underlying H1 revenues soared to £6.95bn, an increase of over 30% and comfortably ahead of forecasts, while operating profits rose to £673m. Underlying operating margins also more than trebled to 9.7% while pre-tax profits rose to £524m.

The improvement was driven by the civil aerospace business which saw H1 revenues rise to £3.26bn, while defence also saw a strong first half with revenues of £1.9bn, however it was the improvement in profits and margins in its civil aerospace division which stands out, with operating income there rising from a deficit of £79m a year ago to £405m in this H1.

Rolls-Royce said it recorded 240 large engine orders in H1, compared to 96 in the same period a year ago. The orders included a record order from Air India for 68 Trent XWB-97 engines. This order pushed the overall order book for engines up to 1,405, with guidance for engine deliveries for this year left unchanged at between 400-500.

Large engine flying hours improved from 65% of 2019 levels in Q1, to 83% of 2019 levels currently, with full year guidance of between 80% and 90% of 2019 levels left unchanged.

Defence also saw a strong H1 with new orders of £2.7bn, which included an order from the US Army for the engines for the Bell V-280 Valor tiltrotor helicopter.

The New Markets division which includes the new SMR nuclear reactor technology has remained a drag on profitability, however the Single Modular Technology has entered stage 2 of the Generic Design Assessment process, as it continues its progress through the regulatory process.

Net debt was also reduced to £2.85bn from £3.25bn.

Today’s update is another important milestone in the company’s recovery story post Covid with the final relaxation of China covid restrictions the last piece of the puzzle at the end of last year.

There is still a long way to go before the Rolls-Royce share price returns to the levels we saw in 2019, when we were above 300p, however today’s update is an important milestone for a business that only three years ago was on the brink of bankruptcy.