Rolls-Royce shares soar as full-year profit beats expectations

 
Rebecca Smith
The company said it had found in-service issues on two engine programmes last year
The company said it had found in-service issues on two engine programmes last year (Source: Getty)

Shares in Rolls-Royce soared this morning, after the firm swung back into profit last year as its major rejig takes shape.

In early trading, shares surged nearly 12 per cent, though the company did note in-service issues on two engine programmes last year - the Trent 1000 and Trent 900. That was due to the "lower than expected" durability of components and led to increased costs.

Total cash costs for the year on those were £170m - a rise on 2016's £90m.

Read more: Rolls-Royce to reveal a rise in profits as it focuses on simplification

The figures

Reported revenues at the aircraft engine maker rose nine per cent to £16.3bn, with civil aerospace service revenues up 12 per cent, while profit before tax was £4.9bn - compared to a loss of £4.6bn last year.

Rolls-Royce said its transformation programme had secured £200m run-rate savings, which was at the top end of guidance. But it still thinks costs and complexity are "too high", so further simplification to move from five to three businesses - announced at the beginning of the year, is aimed at driving this further.

Why it's interesting

The FTSE 100 giant said it delivered 468 large engines in 2017 - a 35 per cent rise on last year.

Its turnaround in results comes after the company reported its largest ever loss last year, noting a particular hit from currency fluctuations. While it reports in sterling, it does a large chunk of its deals in dollars.

For 2018, it is expecting mid-single digit revenue growth, but said at the lower end of expectations, group operating profit could decline. However, it expects to meet its goal of generating cash flow of £1bn by around 2020.

What the company said

Warren East, chief executive, said the results were "ahead of our expectations", but the firm was hit by the increasing cost and challenge of "managing significant in-service engine issues".

He said:

The business unit simplification and restructuring programme that we announced this January will drive further rationalisation and is a fundamental step in the journey started two years ago to bring Rolls-Royce closer to its full potential both operationally and financially.

We are encouraged by the improving financial performance in 2017 with growing revenues contributing to improved profitability and cash generation. Looking forward, sustaining this improvement and delivering increasing cash flow generation will strengthen our position as one of the world's leading industrial technology companies.

What the analysts said

Andy Chambers, analyst at Edison Investment Research said: "Charges relating to turbine blade performance issues in the Trent 1000 engines for the B787 and the T900 engines on the A380 totalled £227m with a £170m cash impact that will double in the current year as the retrofit of redesigned components peaks."

He added: "While the payment to shareholders was held in 2017 it remains a focus for capital allocation as the cash generated rises. Rolls-Royce may finally be starting to take off facing into the wind."

Read more: Rolls-Royce mulls the sale of its marine business, sending shares up

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