Rolls-Royce (LSE: RR) shares nudged higher today on the release of the half-year results report.
The troubled power and propulsion systems specialist described a “good” start to 2021 with “improving” cash flow and profits from continuing operations.
The firm’s Civil Aerospace business is the area most dependant on recovery from the pandemic. And operational performance here improved.
The Rolls-Royce business is recovering
There was something of a recovery in business aviation and domestic large engine flying activity. And that improving market worked alongside “substantial” cost benefits from the company’s restructuring programme.
The directors reckon the programme is set to reduce the cost base by “around a third.” Large engine Long-Term Service Agreement (LTSA) flying hours came in at 43% of the 2019 level. And that’s up from 34% in the second half of 2020.
Meanwhile, the Defence business saw “resilient” demand and has remained unaffected by Covid-19. And the Power Systems business provided stable revenues with an increase in services, offset by a reduction in original equipment (OE) deliveries.
Overall, underlying operating profit came in at £307m. And that’s a leap up from the £1,630m loss the company posted a year ago. The number translated to earnings per share of 4.72p, a big improvement on the 96p lost 12 months earlier.
However, at half time, the net debt figure stood at £3,083m. Last year it was £1,533. But the directors pointed to a “strong” liquidity position “with no maturities before 2024.”
Having refinanced during the chaos of the pandemic, the company aims to address the shortfall in the figures via the restructuring and disposal programmes. It’s targeting savings of around £1bn in 2021. And the disposal programme is “progressing well” towards proceeds of “at least” £2bn.
Two announcements yesterday are good examples of the disposal programme in action. The company said it has entered exclusive discussions with a consortium led by Bain Capital regarding the potential sale of ITP Aero.
And it also signed an agreement to sell Bergen Engines’ medium-speed liquid fuel and gas engines business to Langley Holdings for a much-needed enterprise value of €63m.
Targeting positive free cash flow
Meanwhile, the directors expect free cash flow to turn positive during the second half of 2021. And that should lead to a negative full-year free cash flow figure of around £2bn. If achieved, that would be better than the negative £4.2bn posted for 2020.
Chief executive Warren East said in the report a “good” performance from Defence and order intake recovery in Power Systems enabled “solid” progress. And he reckons the benefits of the restructuring programme in Civil Aerospace “are evident in our reduced cash outflow and improved operational efficiency.”
It seems the hoped-for recovery from the pandemic in Civil Aerospace is happening and gaining traction. But I reckon Covid-19 forced a long-overdue rethink and restructuring at Rolls-Royce. After all, prior to the pandemic, the business had been struggling for years to maintain profitability.
However, there’s still a long road for the firm to travel. And with the shares near 107p, the forward-looking earnings multiple for 2022 is around 25.
I’m in no hurry to buy Rolls-Royce shares now and will watch with interest from the sidelines for the time being.