Rolls-Royce reported a better-than-expected set of FY19 results, beating expectations on the operating profit and FCF lines. The performance was largely driven by Aerospace. Management reaffirmed its £1bn FCF guidance for 2020. We were given litle detail about the 2019-nCoV outbreak, except an unquantified impact on air traffic growth in the near term. All in all, a good development in H2 19, but uncertainties remain in our view.
Companies: Rolls-Royce Holdings plc
Rolls-Royce Holdings (RR. LN, £15.0bn) | IMI (IMI LN, £2.9bn) | John Wood Group (WG. LN, £2.5bn) | Senior (SNR LN, £788m)
Companies: RR/ IMI WG/ SNR
RR’s H1 results were mixed. The charges related to both the ongoing restructuring and Trent 1000 issues remain a drag. Although management confirmed its full year guidance in terms of core operating profit and free cash flow, we stick to our negative view. The benefits are not yet visible and this is likely to remain the case through to 2021.
Rolls Royce reported better than expected FY18 results. Civil Aerospace and Power systems have experienced solid progress. The positive news also came from strong FCF at £641m, above consensus expectations. On the other hand, RR increased its T1000 charges by £236m due to customer disruption costs. RR posted encouraging results but the 2019 outlook is not surprising. We prefer to remain cautious on the stock at this stage.
Rolls Royce reported solid FY results, coming in above expectations in terms of revenues, profit before tax and EPS. The bottom line has actually been supported by lower R&D costs while the gross margin deteriorated due to an unfavourable mix. The group has also seen its FCF strongly improving compared to last year, though remaining well below underlying profit. The outlook looks rather solid in terms of revenue growth, but still under pressure and uncertain in terms of operating margin.
Rolls Royce reported a strong set of H1 results, boosted not only by a rising gross margin level but also by foreign exchange benefits. Organic revenue growth (+6% yoy) was driven by foreign exchange benefits (+5%). Drilling down into more detail shows that revenues from services posted the strongest growth (+8%) while OE revenues grew by 5% organically. The underlying gross margin grew from 16.8% to 18.2%. Profit before financing followed the same trend, rising from €158m to €345m thanks to the Civil Aerospace, the Power Systems and to a lesser extent the Defence Aerospace divisions. On the contrary, the situation remained difficult in both the Marine and Nuclear divisions.
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Rolls-Royce’s underlying performance in FY16 was ahead of both its own and market expectations. Media focus on the non-cash £4.4bn headline FX loss is missing what looks to be the basis for optimism. As the civil model starts to move from investment in engines for the A350 and A330neo into the aftermarket delivery phase over the remainder of the decade, we think cash flow is likely to improve, particularly if supported by an eventual recovery in Marine.
Companies: RR/ RYCEF RRU RRU RRN
Rolls Royce published its FY results with reported figures very different from the underlying ones because of the non-cash impact of the £4.4bn mark-to-market revaluation of derivatives and the £0.7bn charge for financial penalties. Underlying revenues decreased by 2% excluding currency effects, mainly impacted by the Marine activity (-24% vs 2015). The operating margin has been even further impacted and in all activities apart from the nuclear activity. The declining but still positive FCF has allowed the company to distribute a final payment dividend of 7.1p/share. For 2017, RR gave quite a modest outlook, not a surprise after having suffered a lot in 2016, with revenues expected to be almost flat and a slight improvement in margins thanks to transformation savings and increased aftermarket cash revenues in civil aerospace.
In January 2017, Rolls Royce agreed to pay penalties totalling more than £671m to avoid going to a full trial over allegations of bribery and corruption following a complex investigation by the UK’s Serious Fraud Office. It will be settled by paying £497.3m to the UK authorities, $169.9m to the US Department of Justice and $25.6m to Brazil. Intermediaries acting on behalf of RR were accused of making improper payments and gifts to secure deals for engines for civil and military aircraft and for industrial energy generation equipment.
Moreover, the company will have to write down (non-cash) the value of its hedge book, following the Brexit vote and the fall in sterling, from $35bn to less than $32bn. These major headwinds should, however, mark a bottom concerning earnings. Indeed, it should report tomorrow profits of about £700m (compared to £1.4bn in 2015) but these are expected to bounce back in 2017 to more than £800m with Mr East reorganising the group.
Rolls-Royce revealed during its capital market day a mixed performance and outlook in the short term, while estimating a negative FCF for FY 2016. It also gave details on the impact of the IFRS 15 new standards which set new revenue recognition rules.
Rolls-Royce released what can only be considered a poor set of H1 results however this had already been flagged by management with profits expected over the course of H2. Revenues and profits were down across all divisions (revenues down 5% to £6.14bn and profits before financing and tax down 70% to £158m) with continued particular weakness in Marine (revenues down 25% and loss-making half year) and a 91% fall in Aerospace profits on only a 5% decrease in revenues due to the product mix effect. The only positive was cash consumption which was better than expected with FCF a negative €399m, suggesting an improvement in cash and working capital management. The dividend for the half year was halved to 4.60p as had been previously announced. The transformation initiatives are well under way with gross savings of £50m in 2016 and a further £150-200m targeted for 2017.
Rolls-Royce also announced that the changes in IFRS 15 would have a material impact on company reporting with transitional accounting required. We expect this to very much benefit the company in the longer term as it will bring reported profits much closer to cash generation.
The FY16 guidance of marginally lower revenues and an overall halving in profit before tax vs. 2015 was confirmed.
Rolls-Royce continues to work through its current investment phase and external economic turbulence has not further damaged the prospects. The current shortfall in cash flow performance is being addressed. We believe the strength of the core civil engine model should ultimately reassert itself, lifting equity value towards significantly higher cash valuations.
Rolls-Royce delivered a set of results which contained very few surprises given that the guidance had been seriously reviewed last November (please see our Latest of 27/11/2015).
The order book grew by 4% in value terms, underpinning Rolls-Royce's confidence in reaching a 50% market share in the long haul engine market for Civil Aerospace.
Underlying revenue was £13.4bn (FY14: £13.9bn), down 1% at constant exchange rates. Underlying profit before tax was £1,432m (FY14: £1,620m), down 12% at constant exchange rates but stood at £1,355m before one-off items, in line with the lower range of the 2015 guidance of £1,325-1,475m. Restructuring programmes started prior to November 2015 continued to make good progress and are expected to generate annualised cost savings of £145m by the end of 2017. The final dividend to shareholders has been cut by 50% to 7.1p per share (14.1p for 2014). The trading outlook for 2016 remains unchanged.
Looking at the results from a divisional standpoint:
In Civil aerospace (revenue: £6,933m in 2015 vs. £6,837m in 2014; underlying profit before financing: £821m in 2015 vs. £942m in 2014)
Underlying revenues were up 3% as aftermarket revenues grew strongly to offset lower new engine sales. Underlying profit before financing, however, fell 14% reflecting the lower gross margins due to an adverse mix and higher R&D charges. These were partially offset by life-cycle cost improvements, retrospective long-term contract accounting benefits, a reversal of impairment of Contractual Aftermarket Rights and lower restructuring costs in 2015. The order book for the segment grew by £3.8bn with notable orders for the Trent 900 and XWB. The Trent XWB now represents close to 50% of the RR order book.
From an operational standpoint, the new engines development programmes (Trent -1000 TEN, XWB-97 and 7000) are all said to be well on track for entry into service between 2017 and 2018 with the company looking to ensure that the supply chain is ready and delivers cost savings through volume increases during the ramp up in the next five years.
Defence Aerospace (revenue: £2,035m in 2015 vs. £2,069m in 2014; underlying profit before financing: £393m in 2015 vs. £366m in 2014)
Underlying revenues fell 5% impacted by weaker helicopter and trainer volumes but this was partially offset by higher combat OE sales. Underlying profit was, however, up 4% as a flat gross margin and reduced restructuring costs offset the higher R&D charges during the year. Rolls-Royce maintains its strong positions in transport & patrol as well as the combat aircraft markets so that the performance for 2016 is expected to be steady. Rolls-Royce continues to adjust its footprint and cost base to reflect the evolution of programmes and is set to invest $600m in Indianapolis over the next five years to improve the cost base and benefit long-term growth.
Power systems (revenue: £2,385m in 2015 vs. £2,720m in 2014; underlying profit before financing: £194m in 2015 vs. £253m in 2014)
Underlying revenues fell 3% as a result of weaker OE sales which were partially offset by solid growth in services. Underlying profit before financing stood 15% lower as the OE fall impacted the gross margin as well a less favourable sales mix. The outlook for 2016 remains positive with the stable order book offering some visibility. Rolls-Royce suggested that it would look to increase R&D spending in the segment to improve cost competitiveness and develop market opportunities.
Marine (revenue: £1,234m in 2015 vs. £1,709m in 2014; underlying profit before financing: £15m in 2015 vs. £138m in 2014)
Marine saw underlying revenues fall 16% following the collapse in the offshore markets which impacted both OE and aftermarket revenues, resulting in a fall of 94% in the underlying profit before financing as the gross margin melted to £260m from £425m. The £165m fall came as a result of lower volumes and higher restructuring costs that were not compensated by a reduction in commercial and administration costs. The outlook for 2016 remains very challenging as it seems the bottom is yet to be reached in the oil & gas market.
Rolls-Royce has launched two restructuring programmes in 2015 to adjust the manufacturing footprint as well as reducing administrative positions with the benefits expected to start impacting performance from 2016 onwards
Nuclear (revenue: £687m in 2015 vs. £638m in 2014; underlying profit before financing: £70m in 2015 vs. £50m in 2014)
The Nuclear segment saw underlying revenues climb 9% thanks to strong service revenues, in particular from the military submarine work. The mix, however, meant that before exceptionals (£19m R&D credit) underlying profit before tax was flat. Guidance is for a flat overall performance in 2016 but the aim remains to improve operational performance as well as developing civil nuclear opportunities. Investments are required in the medium term to expand the product offering and therefore the recurring services attached.
Rolls-Royce’s new CEO, Warren East, presented the conclusions of his operational review on 24 November.
The key topics included:
1. The review of the portfolio:
Overall the review suggests that, based on a 2020 view, Rolls-Royce has for the most part the right portfolio, as management believes that 80% of the business is exposed to attractive markets and that over 75% of Rolls Royce business has a proven competitive advantage.
Within its Land & Sea business, Rolls-Royce suggests that the future for its Nuclear business is a bright one for both Military and Civil applications. For the Marine business, the review suggests that overall the portfolio of products is the right one and that a slight increase in investments over the course of the next five years should allow the business to be even more competitive on products. The important restructuring underway is expected to continue and should enable it to become even more cost competitive.
The current portfolio of Defence Aerospace products highlights that Rolls-Royce is present at both ends of the product lifecycle, with contributions from mature products coming off in the next five years, but the business is well placed to capitalise on opportunities essentially in the Defence Transport and Patrol aircrafts segment as well as the emerging Combat aircraft requirements.
2. A focus on the Civil Aerospace business:
Civil Aerospace warrants a separate review given that it holds the most growth potential and value generation.
Before tackling the widebody segment, which holds the core of the value. The review suggests that Rolls-Royce still holds a great position in the large business jets segment, a rapidly declining position in the regional jet business which should shrink by 2/3rds over the next five years and a residual position in the narrowbody market through its position as a supplier to Pratt & Whitney.
Warren East made it clear that the narrowbody technologies would continue to be developed through an R&T and R&D spending effort but effectively Rolls-Royce would not bid to re-enter the market before Airbus and Boeing start developing replacements for the A320 and B737 in the mid 2020s with deliveries starting post the 2030s.
Widebody engines have been the company’s principal focus and have concentrated the core of the group’s investment over the last decade. The commercial success is evident with Rolls-Royce expected to reach a 50%+ market share based on its current order book. The segment promises substantial returns but, as explained in the next section, the business model is a complex one.
3. A review of the cash generation and capital allocation policy:
When looking at an individual widebody engine programme there are four cash generation phases:
• Phase 1: R&D and capital investment phase which is a pure cash consumption phase.
• Phase 2: Start of the manufacturing phase with continued cash losses on OE sales as the market share remains small.
• Phase 3: When aftermarket sales start to outweigh OE losses the programme becomes cash positive (this point can sometimes be reached after production has stopped, 10/15/20 years later).
• Phase 4: OE sales nearly ended with now large installed base in need of servicing (20-25 year period).
Overlapping the portfolio of widebody engines explains the cash flow generation situation, with old very successful engine programmes coming to an end (RB211), some more recent engines not generating the kind of returns that were expected (Trent 800, 500) mainly due to the lower volume in operation and the early retirement of part of the installed base. Other programmes will see their cash generation increase (Trent 700,900) as the installed base has grown and the programme enters the 3rd and 4th phases described above. Finally, the Trent 1000 linked to the B787 and the Trent XWB linked to the A350 XWB are currently in phases 1 and 2 and therefore are still consuming more cash.
The fast ramps-ups forecast for both programmes, given their commercial success and the significant increase in air traffic expected, should mean that both programmes should enter the cash generating phase 3 relatively early (within the next 3-4 years depending on the versions). The Trent 7000 engine, a derivative of the Trent 700 engine made for the A330neo, should also be bordering on a positive contribution by 2020.
4. The layout of how the company would improve its communication and transparency over the course of the year to come:
Rolls-Rolls will increase the level of disclosure by division that it includes in its financial releases. This should allow analysts to model the business better. The new framework will be implemented after the full-year results for 2015.
A valuable addition will be a T+4 cash flow indication chart that will allow better modelling of WRC movements across the years which are currently very complex to do due to the Total Care model.
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The group has released a positive trading update, signalling a strong H2 and performance ahead of expectations. The new guidance points to a 6.7% upgrade to revenues and a 10.5% upgrade to EBITDA. Cash generation has been notably strong, at about $26m, which will drive an increase in supplemental dividends with a dividend yield of 7.1%. We raise our TP from 255p to 285p, based on a target P/E of 14x, giving decent upside to the current 11.6x.
Companies: Somero Enterprises, Inc.
Volex has reported interim results that are in-line with expectations following a strong trading update in mid-October. Of far greater significance is today’s announcement of the proposed acquisition of DEKA for a consideration of up to €61.8m on a debt free basis. DEKA is a leading and highly profitable power cord manufacturer, strategically located in Turkey, that serves leading European white goods manufacturers. The acquisition should close in early CY2021, subject to expected Turkish Competition Authority approval. We foresee 15% earnings enhancement in FY2022E with further opportunities for revenue synergies with Volex in the Far East as its operations also vertically integrate, production efficiencies increase and the cost of production falls. The statement highlights that pro forma net debt/EBITDA remains under 0.4x and this provides scope for further bolt-on acquisitions alongside a new $70m RCF and $30m accordion, also announced with the interims.
Companies: Volex plc
Macfarlane has released a strong trading update for the 4 months to October 31 2020 highlighting second half revenue and PBT to date being ahead of 2019 and the expectation that 2020 PBT will be broadly in line with 2019, a strong recovery from the uncertain position at the interim results. Separately, the Group has announced that CFO John Love will be stepping down from his role and the Board to be replaced by Ivor Gray, current Group Financial Controller and Company Secretary. We expect this to be a seamless transition given Ivor's experience in the Group and represents very well managed succession planning by the Board. Reiterate buy rating.
Companies: Macfarlane Group PLC (MACF:LON)Macfarlane Group PLC (5K6:FRA)
Companies: Bacanora Lithium Plc
Directa Plus has announced that in the October collaboration agreement with NexTech Batteries, it has achieved above 400 Wh/kg (watt-hours per kilogram, the usual measure of energy density) in a practical system. NexTech produced several full-scale pouch format cell prototypes using its proprietary cathode and electrolyte materials (with Directa plus graphene) producing 410Wh/kg of specific energy at a weight only slightly below 30g. For comparison, standard Lithium-Ion batteries have an energy density of 100-265 Wh/kg.
Companies: Directa Plus Plc
Xpediator has delivered a healthy trading update, breaking several revenue records during H2 2020. Furthermore, the outlook for FY21 remains promising, reflecting recovery to more normal levels in Transport Services, a full-year impact of the Nidd acquisition, the turnaround of underperforming businesses, and new ventures. The £6m PBT forecast for FY20 highlights an improving margin, albeit this represents a shortfall from FY18. In our opinion management actions, plus recovering markets, can take the Group to peak margins over the next 18-24 months: delivering a marked increase in profitability.
Companies: Xpediator Plc
Breedon has sustained its trajectory of recovery seen since July and August, when it started to outpace 2019 comparative levels of revenue and EBIT, through September and October to the extent that it is now able to issue modestly improved guidance for FY20. The stock has been a stellar performer rising c15% over the past month, is flat on the quarter but 36% higher over the past 12-months and we believe that the rating is not expensive (2022E EV/EBITDA c8x, PE 15.8x, dividend payments initiated and leverage closing in on 1x). Breedon has become one of the sector's most admired businesses, with a consistent record of delivery (proven again through COVID), offering a combination of organic development and acquisition driven growth, excellent free cash flow generation driving a phase of de-leverage and exposure to still positively expectant infrastructure markets in GB and Ireland. We retain a positive view on Breedon at this level.
Companies: Breedon Group PLC
H121 ended strongly for Renewi, recovering from earlier COVID-19 impacts that turned out to be less than management had previously anticipated. Relatively more resilient waste markets and actions taken to control cash flows and reduce costs contributed to this outturn. We have moved estimates ahead in all three forecast years.
Companies: Renewi Plc
We release prudent FY20E and FY21E forecasts as Xpediator continues to gain momentum and operations revert to pre-COVID levels. The Group has made strategic progress year to date. It has implemented a strict cost reduction programme which should drive annualised cost saving of over £0.5m, restructured and strengthened its management team and further integrated acquisitions. Additionally, it is in the process of consolidating its site portfolio, driving further costs out of the business. We believe the market continues to undervalue Xpediator's geographically diverse revenue base, flexible low fixed cost operating model and positive financial outlook. Accordingly, we move our recommendation from Under Review to Buy.
President Trump likes to project himself as a highly successful businessman, but surprisingly little is known about his true financial position. Various articles, including a 2016 in-depth analysis by The Wall Street Journal, have speculated about his income and asset base. All sorts of claims and counter-claims have been made about his wealth – by Trump himself, pitching his fortune at some $9bn, and by journalist Timothy O'Brien, suggesting that it is as “low” as $150m-$250m. It is doubtful whether we shall ever know the truth, but we can use Trump’s UK corporate filings to gain an insight into his businesses in Scotland.
Companies: AVO ARBB ARIX CLIG DNL FLTA ICGT PCA PIN PHP RECI STX SCE TRX SHED VTA YEW
The Group made strategic progress in the first four months of FY20E. It secured contract renewals, new business wins and aerospace qualifications. However, COIVD-19 headwinds impacted full year financial performance. This impact was mitigated to an extent by management swiftly implementing a strict cost reduction programme, ensuring robust cash management. We believe the Group is well positioned with a reduced cost base, a strong customer portfolio and a financially attractive business offering to gain market share and capitalise on pandemic driven supply chain restructuring.
Companies: Velocity Composites Plc
FY20 has been a year of good strategic progress for Directa. Last year’s Setcar acquisition has supported strong revenue growth and, despite some COVID related disruption, contract momentum has continued. The successful launch of the Co-Mask is an example of the Group’s agility and the performance of its materials in demanding applications. The recent agreement in principle to supply graphene for lithium sulphur batteries adds a new vertical with significant promise. We reintroduce forecasts this morning, anticipating a steady performance in H2 with growth towards EBITDA break even in FY22. In our view, Directa is a well-managed business with proven technology and a significant growth opportunity.
AFC has announced it has secured a long term lease over new premises at its Surrey HQ, which will serve as the Group’s large scale H-Power assembly and commissioning facility. We view this as a positive step forward in AFC scaling up its production to meet strong levels of demand in the current environment. We remain very comfortable with our investment thesis and target valuation of 68p per share outlined in our initiation note in September.
Companies: AFC Energy plc
Macfarlane has reported exceptionally resilient 2020 interim results, reflecting the diversification of the business and strong management of the operations and cost base. The Group's ongoing communication has been highly effective for updating investors with key trends in the business and recent share price strength demonstrates an acknowledgement of this. We reinstate our forecasts and buy recommendation following these strong results
Companies: Macfarlane Group PLC
We have today released a new note on The Ince Group plc - this is the first of a series of "explainer notes" that take an in-depth look at the various aspects of the Ince investment case our investors have told us require more clarification. This edition examines the partner remuneration model - the headline for which is that this isn't discretionary bonus, it's more of a revenue share that partners are given in lieu of pay. Thus their remuneration is entirely variable, rather than representing a fixed cost.
Companies: Ince Group plc