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Rolls-Royce boss Tufan Erginbilgiç has no shortage of turbofans on the stock market. The UK engine maker’s turnaround is continuing to accelerate. Following an 11 per cent jump on blowout first-half results and the resumption of a dividend payment, its shares have now quintupled since the start of 2023. Yet there is still a way to go before Rolls-Royce reaches cruising altitude.
The group’s progress has certainly been spectacular. It reported £1.1bn of operating profit in the first half of the year, up 74 per cent compared with last year. Most of that was driven by its largest and mission critical civil aerospace division: margins rose from 2.5 per cent in 2022 to 18 per cent, closing much of the gap with rival Safran. Rolls-Royce now expects to make up to £2.3bn of operating profit this year. That already brings it within sight of its midterm guidance, sparking speculation that it will upgrade its targets.
Part of this is commercial discipline. Rolls-Royce is writing better contracts for its engines — helped, no doubt, by the achievement of a 50 per cent or so market share in the widebody segment, according to Nick Cunningham from Agency Partners. The company had a bigger share of revenues in the first half from service contracts, which are typically higher margin than equipment deliveries. While profitability may dip in the second half, the group is clearly in a much stronger competitive position than it has been.
It should also be relatively sheltered from some of the headwinds that are buffeting rivals. Supply chain constraints, blamed by Airbus for slower aircraft deliveries, cost Rolls-Royce £200mn in the first half of the year. That was more than offset by cost cuts, expected to exceed £250mn by year-end. And while airlines such as Ryanair have warned of reduced pricing power, there is no indication as yet that demand for flights has taken a nosedive. Civil aviation remains a cyclical business, of course, but the steps that Rolls-Royce has taken to beef up its smaller divisions, cut central costs and bolster its balance sheet should make it more resilient.
The air is becoming thinner for Rolls-Royce, given its rapid stock market ascent. But the group is still trading at a 9 per cent free cash flow yield on 2027 estimates, according to Charlotte Keyworth at Barclays, compared with Safran on 4-5 per cent. The UK company has further to go before it runs out steam.
camilla.palladino@ft.com
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