Rolls-Royce lifts FY profit guidance after strong first half

(Sharecast News) - Rolls-Royce lifted its full-year profit guidance on Thursday as it hailed a strong first half and said it was reinstating dividends. In the first half, underlying operating profit rose 74% on the same period a year earlier to £1.15bn. The company said this was driven by its transformation programme and strategic initiatives, with commercial optimisation and cost efficiency benefits across the group.

Underlying operating margin rose by 4.4 points to 14%, with the largest improvement in civil aerospace, which delivered an operating margin of 18%, up from 12.4%. This was due to higher aftermarket profit from large engine LTSA (long term service agreements) and time and materials, a stronger performance in business aviation in both original equipment (OE) and aftermarket and net contractual margin improvements.

Rolls-Royce said underlying revenue grew 19% to £8.18bn.

Chief executive Tufan Erginbilgic said: "Our transformation of Rolls-Royce into a high-performing, competitive, resilient, and growing business is proceeding with pace and intensity. We are expanding the earnings and cash potential of the business in a challenging supply chain environment, which we are proactively managing. We are on track to deliver our mid-term targets.

"Our strong first half results reflect the continued delivery of our strategic initiatives and a relentless focus on commercial optimisation and cost efficiencies across the group. These results and our increased financial resilience give us the confidence to raise our 2024 guidance and reinstate shareholder distributions in respect of the full year 2024 results."

The company now expects 2024 underlying operating profit of between £2.1bn and £2.3bn, up from previous guidance of £1.7bn to £2bn. It also expects free cash flow of between £2.1bn and £2.2bn, up from a previous forecast of £1.7bn to £1.9bn.

At 1005 BST, shares of the aerospace engineer were up 8.9% at 489.60p.

Russ Mould, investment director at AJ Bell, said: "Rolls-Royce has delivered one of the most impressive turnarounds in living memory. Reinstating the dividend is the cherry on top for investors who have backed the company in recent years, rewarded by significant share price gains and now some potential income on top.

"Five years ago, the market was fretting about faults with Rolls-Royce's Trent 1000 engines. Covid then struck and left the balance sheet in tatters, prompting a £5 billion emergency plan to prop up its finances. Since then, Rolls-Royce has battled considerable disruption in the aviation industry and had to take difficult decisions to put the company back on track.

"Strong free cash flow has helped to get debt under control, it is generating better returns on the money spent on the business, and it is on track to hit fairly ambitious targets. Raised full-year guidance for profit and cash flow and the imminent return of dividends shows there is considerable momentum in the business. While the scale of the dividend might only be tiny and produce a minuscule yield, the fact it is returning any cash at all is a significant step forward.

"The share price has soared by 600% since October 2022, delivering the kind of returns that investors may only dream of. It's certainly unusual for a company of its size to be able to produce such strong share price returns, but that just goes to show that Rolls-Royce was once stuck in a very deep hole and it has managed to climb back out."