Rolls-Royce (LSE: RR) shares tumbled in response to first-half results. Due to inflationary pressure, underlying profit margins declined.
Then the Bank of England hiked interest rates as high as 1.75%, which is not great news for borrowers. And lest we forget, Rolls-Royce is a big borrower.
At 30 June, the company’s net debt still stood at £5,142m. And that barely changed from December’s £5,157m. Rolls-Royce shares fell by a hefty 9% on the day.
But since then, the share price has picked up a little bit. It’s not a huge rebound so far. But it does suggest that, after properly digesting the news, maybe investors don’t think things are so bad after all.
The Rolls-Royce share price has remained pretty stable for a few months now, despite a deteriorating economic outlook. I’m wondering if that means it really is around the lowest it’s going to go. And whether the only way now might be up.
Margins might have dipped. And cash flow, though starting to come through, really isn’t back up there yet. But Rolls hadn’t really been expecting too much from the first half’s performance anyway.
Outlook
In fact, the company didn’t change its outlook for the full year, after first setting it out in February. The board still expects to achieve three milestones.
One is to reach low-to-mid-single digit underlying revenue growth over the year. That’s perhaps not too stretching considering the weakness of 2021.
Rolls is also still targeting a full-year operating profit margin broadly unchanged from last year. Despite the squeezed first-half margin, it says we should expect an improvement in the second half to compensate.
Cash flow
Finally, Rolls is still aiming for modestly positive free cash flow for the full year. That’s not quantified, so there’s some flexibility there. But a year of any positive free cash flow could mark a turnaround.
Despite the share price turmoil, I don’t think much has actually changed at all in the past week or so.
Though debt was barely changed, at least it isn’t rising. And the £2bn the company is expecting from the sale of ITP Aero is still on track to be delivered in the second half. In fact, the interim report told us that the completion of the transaction should happen “in the coming weeks”.
Debt reduction
Rolls has earmarked the cash to help reduce debt. And once we see some significant progress there, the chances of hitting any further liquidity problems will surely diminish quite a bit.
The rest of the year is not plain sailing though. Inflationary pressures and supply chain difficulties remain, and look set to plague the second half. It’s not going to hit only Rolls-Royce directly, but it could also dent the flying hours its customers are hoping to achieve.
So I do still see plenty of threats. And I reckon Rolls-Royce shares could remain down in the dumps for some time yet. I am starting to see long-term value here, but I’ll keep watching and waiting for a while longer.
