It has been a brilliant year for the Rolls-Royce (LSE: RR.) share price. That has continued today (1 August) with the stock up 9.2% in early morning trading.
The reason for the spike is the release of its half-year results. It has been a volatile last five years for the aerospace giant. After nearly going bankrupt during the pandemic, CEO Tufan Erginbilgic has done a spectacular job at turning the business around.
With that, let’s take a closer look at its latest release.
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An overview
There are plenty of positives to take away from what the business called a “strong first half”. It’s clear to see why investors have been piling into the stock this morning.
For the period, Rolls posted a “significantly higher” operating profit, up 74% versus the same period last year to £1.1bn.
This was fuelled by its ongoing transformation programme, which has led to “increased cost efficiency benefits across the group”.
Its Efficiency & Simplification programme is set to deliver over £250m of cumulative savings by the end of 2024 and £400m-£500m in the medium term.
Alongside that, Rolls recorded £1.2bn in free cash flow, up £800m from 2023. It had previously given guidance for that figure to come in between £1.7bn-£1.9bn for the year. It now expects to deliver between £2.1bn-£2.2bn.
Less debt and shareholder distributions
An issue of mine with Rolls over the last couple of years has been its debt burden. But it has made great strides to reduce it. Net debt now sits at just £800m, down £1.2bn from the same time last year.
That means its balance sheet is now looking in a lot better shape. As a result, Rolls revealed it will reinstate shareholder distributions following its 2024 results, starting at a 30% payout ratio of underlying profit.
With it lifting its guidance for underlying profit to come in between £2.1bn-£2.3bn, up from the previous £1.7bn-£2bn, that equates to a potential £600m-£700m being returned to shareholders
Over the medium term, it expects regular shareholder distributions to be based on a 30%-40% payout ratio.
Supply chain challenges
There’s no doubt this is yet again another great showing from Rolls. But there were a few issues I saw.
The update touched on supply chain issues. While the firm seems to be navigating these well so far, there’s always the risk this could become a more serious issue.
That could lead to a delay in the delivery of the parts and materials the firm needs to build engines. While its free cash flow guidance already includes a £150-£200m cash impact related to supply chain issues, Rolls said it expects these challenges to persist for another 18-24 months.
Turnaround on track
I’ve been holding off from buying Rolls. But Erginbilgic seems to be delivering on his promise of turning the business around by focusing on rebuilding its balance sheet and boosting profitability.
The return of shareholder distributions is also another major positive as he continues with his strong post-pandemic recovery. With that in mind, I think it could be about time I consider adding the stock to my portfolio.
