over 2 years ago • 2 mins
Rolls-Royce’s cash-generating business model should leave it in a strong position as the airline industry emerges from its COVID-fueled funk.
I’m Karen Thomas-Bland, a board advisor, consultant and non-executive director.
A medium-term recovery play in Rolls-Royce (ticker: RR).
Rolls-Royce swung from a $7.5 billion loss in 2020 to a profit of $544 million, helped by cost savings achieved through the restructuring and a $388 million tax credit. Stripping out the impact of derivatives, underlying profits were $204 million.
The group expects to turn free-cash positive in the second half, bringing the full-year free cash outflow to around $2.8 billion. Overall, it represents a potentially strong recovery play as the world reopens.
Rolls-Royce's main business is producing and servicing aircraft engines, increasingly for bigger widebody planes (passenger planes with two aisles). The group’s organised into five customer-facing businesses: Civil Aerospace, Defence Aerospace, Power Systems, Marine, and Nuclear.
It is currently going through a big restructuring effort: 8,000 of the 9,000 job cuts promised have happened so far, disposals are underway, and investment has been moved away from Civil Aerospace (core division).
Could have some upside in the short-to-medium term as the world reopens. Deep restructuring should drive bigger operating margins within three to five years in comparison to pre-pandemic levels. If this does happen, it could mean that Rolls-Royce has emerged out of the crisis in better shape. Trading at 35% below estimate of fair value and earnings forecasted to grow 9.76% per year.
Debt levels (doesn’t mature to 2024), recovery of the aviation industry post pandemic (looking positive and mitigated due to Rolls-Royce being in other markets, e.g. defence), cost control in the business and delivery of restructuring efforts (this is reported to be making good progress and showing positively in interim update).
This insight was submitted by a community member for information and educational purposes. It doesn't represent the views of the Finimize team and shouldn't be taken as financial advice.
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