Rolls-Royce have risen to their highest since the start of the coronavirus pandemic after it surprised investors with a big jump in expected profits on the back of high demand in its jet engine and defence businesses.
The FTSE 100 engineering firm said its civil aerospace and defence units had reported higher sales and “cost efficiencies” that improved profitability, in an unscheduled trading update on Wednesday morning.
Rolls-Royce’s chief executive, Tufan Erginbilgic, took over at the start of the year with a mandate to raise its profits, which had lagged behind competitors before pandemic travel restrictions caused a dramatic slump in its earnings
The company said it now anticipates full-year underlying operating profit will sit between £1.2 billion ($1.55 billion) and £1.4 billion, up from a previous guidance of £800 million to £1 billion, as the impact of a vast cost-cutting and business “transformation” program takes effect earlier than predicted. Market consensus is currently for a £934 million underlying operating profit, the company said.
Erginbilgic.
The group, whose engines power the Airbus A350 and Boeing 787 long-haul jets, said underlying operating profit for the first six months would come in at just over twice the market expectation of £328million.
Today’s trading update, ahead of next week’s H1 presentation, has seen the shares soar above 160p and to their highest levels since March 2020, after the company raised its full year underlying profits guidance from between £800m and £1bn, to between £1.2bn and £1.4bn.
Rolls-Royce also raised its free cash flow estimates of between £600m and £800m to between £900m and £1.1bn.
Back in May, the top end of estimates was for operating profit of £1bn and free cash flow of £0.8bn. So the new figures represent a big improvement. And that probably means the buoyant reaction of the stock is justified.
The directors reckon the outcome has been driven by “early transformation benefits”. And that means to me that Rolls-Royce is one of those rare stock-beasts where the turnaround in the underlying business is actually working.
Its full-year forecasts were overhauled, with underlying operating profit now expected in a range between £1.2 billion to £1.4 billion, up from £934 million, helped by “higher volumes, commercial improvements and cost efficiencies”.
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