Narrow-Moat
Rolls
Royce
reported
better-than-expected
half
year
results,
and
has
reinstated
its
dividend
for
the
first
time
since
the
pandemic.
•
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.
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