Rolls-Royce half-year results has "plenty for the bulls to like"

(Alliance News) - Rolls-Royce Holdings PLC upped its outlook and announced plans to reinstate its payout, as the jet engine maker's "transformation" under Chief Executive Tufan Erginbilgic bears fruit.

Shares jumped 9.0% to 490.23 pence, the best FTSE 100 performer. Shares hit a record high of 502.20p on Thursday morning.

In the first half of 2024, Rolls-Royce said pretax profit was flat at GBP1.42 billion compared with a year prior. Operating profit more than doubled, however, to GBP1.65 billion from GBP797 million, as operating margin rose to 18.6% from 10.6% a year before.

Revenue climbed to 18% GBP8.86 billion from GBP7.52 billion.

Rolls-Royce confirmed shareholder distributions will be reinstated with 2024 full-year results. The firm intends to pay out 30% of underlying pretax profit for 2024 and a 30% to 40% ratio thereafter.

The last time the company paid dividends was before the pandemic in January 2020.

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."

Reflecting the strong first half, Rolls-Royce increased its guidance for 2024 underlying pretax profit to GBP2.1 billion to GBP2.3 billion from GBP1.7 billion to GBP2.0 billion before. Underlying pretax profit was GBP1.26 billion in 2023.

The firm expects 2024 free cash flow of GBP2.1 to GBP2.2 billion, up from a GBP1.7 to GBP1.9 billion view previously. This was GBP1.29 billion in 2023.

German bank Berenberg said the first-half results were "much better" than the market expected. It said there was "plenty for the bulls to like [and] little for the bears to pick on".

Berenberg rates Rolls-Royce at 'sell', however, a recommendation predicated on the long-term and "not based on near-term numbers". Berenberg said its has always believed the near-term numbers had upside risk, due to post-pandemic demand in Rolls-Royce's Civil Aerospace arm.

Berenberg added: "Inherent project risk remains at Rolls-Royce, which has been its Achilles heel for the past two decades. While the stock is crowded, it admittedly still has momentum and investors are generally struggling for better ideas in commercial aerospace, particularly UK-listed ones. We note that hedge fund bulls were recently telling us they would tactically take profits once the inevitable dividend was introduced and, while this is now done, we doubt investors will be looking to exit, absent pending bad news. Air traffic is now an important watch item.

"On a trailing basis, air traffic continues to go from strength to strength, but several low-cost carrier airlines have issued profit warnings on the back of excess capacity in recent weeks. If this permeates into the longer-haul market (which, in our view, seems probable), this could be adverse for cash momentum."

By Eric Cunha, Alliance News news editor

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