Rolls Royce was already in serious difficulty even before the pandemic wind came blowing in from China a year ago, due to problems with its Trent 1000 engine that powered the Boeing 787 Dreamliner.
Today’s full year results were not any better,and did not come as a surprise for CMC Markets UK chief market analyst Michael Hewson, given the virtual grounding of civil air travel which almost delivered a final coup de grace to the business last year.
“At one point there was some concern as to whether this iconic British brand would be able to survive in the wake of the collapse in air miles as a result of the pandemic,” Hewson said.
Still in the red
This morning’s operating loss of £2.1bn is almost identical to 2018’s results.
“While the size of the loss is certainly sobering, unlike last year optimism is probably in shorter supply due to the uncertainty about when air travel is likely to return to any kind of normal post pandemic,” he noted.
If the £2.1bn operating loss wasn’t bad enough, when other costs are added the loss balloons to an even bigger £4bn, due to the addition of other charges, Hewson pointed out, including a £1.7bn underlying finance charge related to its FX hedge book, due to lower US dollar receipts in 2020, as well as future years.
“Coming into the pandemic, the company was very reliant for up to 50 per cent of its revenue on these aviation air miles, which means the company was, and still is facing a significant cash outflow, even with the thousands of job cuts and cost savings,” he noted.
Management has gone to great lengths to deal with this cash flow problem in order to get the business through to the other side of the pandemic.
The launch of a £1bn bond issue as well as a £2bn 10 for 3 rights issue at a 41 per cent discount to 130p was eventually taken up by shareholders, and along with the progress on the vaccine rollout the company has seen a decent rebound in the share price, from the 17-year lows we saw in September last year.
Not out of the woods yet
The company still is not out of the woods yet, announcing that it is likely going to have shut its factories in the summer for two weeks to help stem the losses.
“This morning’s full year results only serve to reinforce the scale of the challenge facing the civil aerospace side of the business, however at least in terms of revenues they’ve managed to do a little bit better than was expected,” Hewson said.
“With revenues coming in at £11.76bn, [this is] still well below the £15.45bn we saw in 2019, but certainly much better than had originally been feared all the way back in the late summer of last year.”
Free cash outflow for the last tax year came in at an eye watering high £4.18bn.
At its last trading update, the company estimated a free cash flow outflow of £2bn for 2021, which was based on wide body engine flying hours of 55 per cent of the levels of 2019, with an expectation of turning cash flow positive at the end of the second half of this fiscal year, with positive free cash flow of £750m in 2022, based on engine flying hours of 80 per cent of 2019 levels, Hewson noted.
“This expectation hasn’t changed, even though it comes across as very optimistic, given that since they made that assessment air travel has remained very much in the doldrums due to the Europe wide lockdowns that have been in place since the beginning of January,” he added.
At the time this seemed a touch optimistic, Hewson continued, given that air travel is unlikely to be able to return to any semblance of normal this year, given that the government is embarking on a very slow reopening policy.
“This morning’s numbers are a sobering reminder of how much damage the pandemic has done to an iconic brand, and also illustrate how hard the long road back will be,” he remarked.
With normal service in civil aviation likely to take years to return to normal it will be more important than ever that Rolls Royce steps up in other areas of its business to offset the revenue hit to civil aviation over the next few years, and get greater returns there.
“The hope is that investors and shareholders retain the patience seen so far in terms of the rally in the share price off last year’s multiyear lows,” Hewson concluded.