Shares in Rolls-Royce Holdings (LON:RR) have been little changed this year, outperforming a subdued FTSE 100 index, despite the company’s issues with some of its engines, most notably, the Trent 1000. The British engine maker, however, has positively surprised its shareholders with profits and cash flow updates throughout the year.
2018 marked by engine issues
Rolls-Royce has come under pressure this year amid problems with its Trent 1000 programme, cautioning in April that it needed to increase the number of inspections of the problematic engines, with the move resulting in higher costs. The company subsequently suffered a shortage of parts needed to repair hundreds of faulty engines and in June, warned that further issues could lead to combined additional 2018 cash costs of around £100 million.
In October, Rolls-Royce warned that it would deliver fewer Trent 7000 engines than expected in the last quarter of the year, while last month, the group revealed that about one in 10 of its Trent 700 engines needed repairs.
Focus on cash flow guidance
It, however, has not all been bad news out of the British engine maker, which surprised investors in June with news that it expects to exceed its cash flow target by 2020, with the update sending Rolls-Royce’s share price soaring. Earlier this month, the group forecast that its profit and cash flow for the current year would come in at the upper end of its full-year guidance range, prompting analysts at Jefferies to say that the update should at least reassure.
Hargreaves Lansdown analyst Nicholas Hyett also sounded an upbeat note on the engine maker following the latest update, arguing that by focusing on cash flow rather than accounting profit, the engine maker’s chief executive Warren East is “using the right metrics to measure success”.
He, however, cautioned that ‘there’s work to be done yet,’ with the group’s Civil Aerospace division still loss making and with the costs of resolving issues around the Trent engine line to “be in the hundreds of millions for the next few years”.
“With that in mind, we can’t say the engine’s roaring just yet. But it does look like Warren East has at last got things ticking over,” Hyett concluded.