Rolls-Royce Holdings Plc surged to the highest in more than three years after the UK aircraft-engine manufacturer unexpectedly raised its profit targets, aided by a travel boom that’s boosting the lucrative maintenance business.
(Bloomberg) — Rolls-Royce Holdings Plc surged to the highest in more than three years after the UK aircraft-engine manufacturer unexpectedly raised its profit targets, aided by a travel boom that’s boosting the lucrative maintenance business.
The company expects to report operating profit of as much as £680 million ($877 million), which is twice the consensus estimate of £328 million, Rolls-Royce said in an unscheduled trading update. The jet engine manufacturer also raised its full year guidance to expect operating profit of £1.2 billion to £1.4 billion, from a previous estimate of as much as £1 billion.
Rolls-Royce rose as much as 25% in London trading, the most since Feb. 23, taking the stock to its highest since March 2020. Even before today, the stock was the best performer on the FTSE 100 Index this year.
The upbeat outlook is a vindication for Chief Executive Officer Tufan Erginbilgic, who is in the middle of an extensive turnaround after calling the prime UK manufacturer a “burning platform” shortly after taking over at the start of the year. The company, which primarily makes engines for widebody jets that connect long-haul destinations, saw demand wiped out at the height of the pandemic when airlines were forced to ground fleets amid travel restrictions and quarantines.
“Better profit and cash generation reflects greater productivity, efficiency and improved commercial outcomes,” Erginbilgic said in the statement. “Despite a challenging external environment, notably supply chain constraints, we are starting to see the early impact of our transformation in all our divisions.”
Pricing Power
Engine makers typically generate large parts of their revenue from servicing turbines installed on global airline fleets. Rolls-Royce is the sole supplier of engines for the Airbus A350, and also makes engines for jets like the Boeing Co. 787 Dreamliner and the now-discontinued Airbus A380.
The widebody market has come back forcefully after suffering during the pandemic because many global routes were effectively cut off. Airbus SE has said the segment for the largest aircraft is showing strong demand as airlines upgrade their aging fleet.
Both Airbus and Boeing report earnings later on Wednesday. On Tuesday, General Electric Co. also raised its full-year guidance as the manufacturer capitalized on an air travel boom that continues to drive demand for jet engines.
“It’s taken longer than expected, but the improved guidance shows that Rolls is also finally getting some pricing power, after having mispriced some of their contracts,” said Nick Cunningham, an analyst at Agency Partners in the UK. “It’s still too early to see this as a win for the new CEO, although raising pricing was one of the things he said he would do.”
Flying Hours
Free cash flow will reach as much as £1 billion in 2023, helped by what Rolls-Royce called early transformation benefits. The main civil aerospace business will return to an operating profit of about £400 million in the first half, after a loss of £79 in the year-earlier period.
The company also expects its defense business to report a 38% increase in operating profit, amid the ongoing war in Ukraine. At the same time, Rolls-Royce flagged that it expects to have to pay £100 million as part of the outcome of a legal judgment, details of which it didn’t specify.
Engine flying hours in the first half of 2023 have risen to 83% of 2019 levels, according to Rolls-Royce. The company is scheduled to report full earnings on Aug. 3.
(Updates with details of unit performance in sixth paragraph.)
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