Narrow-Moat Rolls Royce reported better-than-expected half year results, and has reinstated its dividend for the first time since the pandemic.
Key Morningstar Metrics for Rolls Royce Stock
• Morningstar Fair Value Estimate: 380p
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High
What We Thought of Rolls-Royce's Earnings
The British aerodefence company announced an operating profit of £1.1 billion, despite facing supply chain challenges.
The improved operating profit reflects a 74% increase on the previous year and an operating margin of 14%, which is 4.4 percentage points higher than the year before.
The better-than-expected financial performance was driven by all three of Rolls-Royce's business divisions. Shares in the company are up 60% so far this year, and rose 10% on Thursday's news of the restored dividend. At a current price of 470p, shares are screening as overvalued by Morningstar metrics.
In civil aerospace, aftermarket profit surged due to higher long-term service agreement margins and an increased number of large engine shop visits.
Its defence division saw strong profit growth because of improved aftermarket performance in the transport and combat sectors, and increased demand for its submarine operations.
Power Systems was also able to capitalise on the growing demand for data centers.
Rolls-Royce Debt Down, Profit Forecasts Up
The continued implementation of Rolls-Royce's cost management programs is expected to deliver total annualised savings of £400 million to £500 million by midterm.
Meanwhile, the company is putting in place procurement initiatives to partially offset supply chain inflation and disruption costs.
Rolls-Royce continues to invest in enhancing the time-on-wing of its modern engines, including ambitious projects aimed at doubling the time-on-wing of the Trent XWB-97 in challenging environments.
As well as improvements in its operating profit figures, the company reduced its gross debt to £3.6 billion, reaching a net debt to EBITDA ratio of 0.3x allowing the company to achieve investment grade ratings (investment grade required net debt to EBITDA of 1 to 1.5 times) and to reinstate dividends, starting with the full year 2024 results.
The policy will distribute 30% to 40% of underlying profit after tax, starting at 30%.
Given the robust first-half performance, the company revised upwards its 2024 guidance for both operating profit and cash flow.