Rolls-Royce shares hit an 18-month low in the leadup to its Q1 numbers back in May, but have performed much better since then, albeit in a confined range. Today’s H1 numbers have seen the share price slide again after the company slipped to a £111m loss.
The various problems with the resumption of civilian air travel have meant that the rebound in revenues that had been expected in 2022 has been slower to materialise than expected. Nonetheless long-term flying hours in Q1 were 42% higher than the same period last year, although that’s quite a low bar.
Rolls-Royce has been making progress, but it has been glacial as today’s share price reaction appears to indicate.
The company also announced a deal in May with Qantas for 12 Trent XWB-97 engines to power 12 A350’s, along with a service agreement for said engines. These engines which are made in Derby are said to be so efficient they will be able to fly non-stop between London and Sydney.
The sale of ITP Aero for £2bn has also been completed this week with the proceeds expected to be used to pay down its debt, which currently sits at £5.14bn.
As we look to today’s H1 numbers, investors will have been looking for progress in in its power systems business, as it looks to diversify away from its civil aerospace division which still accounts for the majority of its revenue. T
otal revenues came in at £5.3bn a modest increase on last year, however the company slipped to a bigger than expected underlying loss before tax of £111m, as higher costs impacted on margins. Gross margins fell from 21% last year to 17.7%, while financing costs rose to £236m from £174m.
At first glance progress is certainly being made in power systems with revenues coming in at £1.37bn, a rise of 20%, and comfortably beating expectations. Order intake here was £2.1bn, a 53% rise from the prior period and a record quarter as well.
Defence was disappointing with revenues falling 9% to £1.61bn with the company blaming delays in the timing of the next tranche of the F-35B, and lower spare engine sales.
Civil Aerospace which accounts for the bulk of the company’s revenue saw an 8% rise in underlying revenue to £2.34bn, with large engine flying hours still at 60% of 2019 levels, with an expectation that this will rise to 70% by year end and return to pre-pandemic levels in 2024.
The small nuclear reactor project which was announced last year following investment from private sources and the government has the potential to be a huge revenue earner, despite significant upfront costs. Rolls-Royce has shortlisted six potential sites for a factory to build the said reactors, while the Russian invasion of Ukraine has given a lift to its defence business.
This New Markets division has thus far not generated any revenue of note and has seen operating losses more than double to £48m.
In Q1 Rolls-Royce said trading was in line with expectations and has maintained this guidance on the basis that business activity in civil aerospace will continue to improve.
All in all, today’s H1 numbers are disappointing, progress is being made in civil aerospace and power systems, but the deterioration in margins is concerning and something that new CEO Tufan Erginbilgic will need to get to grips with when he replaces Warren East at the end of the year.
In the longer term there is room for optimism with its New Markets division, however investors appear to be running out of patience, if today’s share price falls are any indication.