Rolls-Royce shares rise as return to flying boosts engine maker

·3-min read
Photo: Rolls-Royce
Rolls-Royce shares rose following the update. Photo: Rolls-Royce

British engine maker Rolls-Royce (RR.L) said its financial performance so far this year had been in line with forecasts as it kept its full-year financial guidance for 2022 unchanged.

In a trading update on Thursday it said it was "well positioned" for anticipated growth in its end markets, adding it continues to expect "positive momentum" in trading despite ongoing risks stemming from macroeconomic uncertainties.

A gradual return to flying as coronavirus restrictions eased across most countries and increased government investment in defence helped boost Rolls.

It added that the products it provided in defence were delivered and maintained over decades, meaning they are not exposed to individual geopolitical events, but, increased government spending underpinned the long-term growth outlook, it said.

"The Defense business continues to be a beacon of strength, and although it comes at the expense of near-term profits, it’s the right move to continue investing in future growth," said Laura Hoy, equity analyst at Hargreaves Lansdown.

Shares in the FTSE 100 (^FTSE) firm climbed 0.6% in early trade on Thursday in London following the announcement.

Rolls announced it was working with its global supply chain in an effort to limit the impact of disruptions and said that long-term sourcing agreements and hedging policies designed to limit volatility in raw material inflation, gave it "some near-term protection".

"Our long-term sourcing agreements and hedging policies designed to limit volatility in raw material inflation, give some near-term protection and we have increased inventory levels to help mitigate the impact," Rolls said.

The company, which is on the hunt for a replacement for CEO Warren East, said flying hours, which determine revenue-generating maintenance visits, were 42% higher over the first four months of the year compared to the same period of 2019.

Hoy added: “Rolls Royce hasn’t been able to catch a break over the past few years, but we’re finally starting to see green shoots amid a budding recovery.

"The recovery in engine flying hours is continuing to build, though the ever changing state of affairs in China means getting back to pre-pandemic levels is still some way off.

"Still, the resumption of air travel is a net positive for the new, leaner business. It’s encouraging to see new orders coming through the pipelines as airlines work to build up capacity and pounce on a travel-hungry public."

Read more: Compass share prices surges as it unveils $500m stock buyback plan

It also provided an outlook for the medium term for its Civil Aerospace arm, forecasting growth in underlying revenue at a low double-digit percentage from 2021.

Operating margin in the business is expected to grow in the high single digits, with trading cashflow anticipated to exceed operating profit.

It noted renewed coronavirus measures in China are holding back crucial service revenue from its jetliner engines even as the easing of travel rules has driven a recovery in passenger demand in markets including Europe and the Americas.

"Passenger demand is recovering on routes where travel restrictions have been lifted, such as in Europe and the Americas, but additional COVID-19 restrictions have resulted in fewer flights in China where the situation is still evolving," it said.

It comes after revenues at the engine manufacturer plummeted during the two years over which the coronavirus pandemic roiled global travel. Demand for the wide-body engines in which it specialises has been hardest hit, with long-haul flights returning more slowly than regional and domestic trips.

Rolls, which reported a profit for last year, spurred by cost cuts and the travel restart, reiterated previous guidance with expectations for revenue growth of less than 10%.

Watch: What are SPACs?