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Rolls-Royce shares slide ahead of tough recovery

FTSE 100 listed engineering firm, Rolls-Royce Holdings plc (LON:RR), watched its shares drop around 9% on Friday, as the company laid bare the challenging year its had, and the harsh realities of restructuring.

During the 11-month period to the end of November, the company reported that large engine LTSA invoiced flying hours fell to approximately 42% of what they were the year before. Rolls-Royce said that although flying hours had picked up since April, the pace of recovery has since dropped, as a result of a second wave of infections in some geographies.

During Q3, large engine flight hours were around 29% of what they were the previous year, though this was a marked improvement from Q2, where traffic was just 24% of what it was in 2019. As a result of the slowing recovery, the company said its guidance remains unchanged, though it has reduced the pace of it large-engine production.

Speaking on its other business segments, Rolls-Royce said that business aviation has been less impacted than commercial flights, in spite of border restrictions coming into force in many regions. Similarly, it said that its defence business has remained ‘resilient’, with a strong order book – including 56 EJ200 jet engines bought by the German Air Force – and an encouraging 2021 forecast (partially led by the UK’s bolstered MoD budget).

Its Power Systems business saw a ‘significant fall in demand’ in non-governmental sectors during 2020, with some signs of recovery during the second half, spearheaded by the Chinese market. On a brighter note, its Small Modular Reactor consortium benefitted from the increasing favour for nuclear power, securing strategic agreements with Exelon Generation and CEZ, and the UK Government signing a £215 million four-year development deal.

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Speaking on the company’s performance and the long road to recovery, Rolls-Royce CEO, Warren East, said: “We have made rapid progress on our restructuring programme and the consolidation and reorganisation of our Civil Aerospace footprint is well underway. Our £5 billion recapitalisation package in November was well supported and has increased our resilience and strengthened our balance sheet. The outlook remains challenging and the pace and timing of the recovery is uncertain. However, our actions have given us a strong foundation to deliver better returns as our end markets improve and we continue to drive our ambition of delivering more sustainable power to support the creation of a net zero carbon economy.”

With its credit facilities in mind, and excluding lease liabilities of around £2.1 million, and liquidity of up to £9.0 billion, the company expects to end the year with net debt of between £1.5 billion and £2.0 billion.

Rolls-Royce added that on the whole, “The pandemic is causing a reduction in demand for our Civil Aerospace products and services that we expect will take several years to recover”.

The upshot of this view has been the company’s ‘major reorganisation’ programme, announced on May 20. Having made progress towards its £1.3 billion cost saving target, the company says it will have to cut 9,000 jobs by 2022, with the 5,500 job losses expected by year-end being 500 more severe than the previous estimate of 5,000 redundancies.

Though undergoing a process of consolidating the manufacture of its aero-engine structures into ITP Aero, the company is actually considering of disposing of ITP Aero altogether, having just confirmed the £2 billion disposal of its nuclear instrumentation and control business.

Commenting on challenging road ahead for Rolls-Royce, Third Bridge Senior Analyst, Ben Nuttall, said: “Rolls Royce’s cash receipts will recover as the world starts to fly again.”

“Recent vaccine news creates an interesting upside case for Rolls Royce, which could see a quicker end to this period of high cash burn without them having to raise further liquidity.”

“Rolls Royce is experienced at restructuring. The company undertook major restructuring after the financial crisis in 2010, then again in 2013 and 2016.  They know how to make significant savings, but the aerospace giant will still have to navigate a bumpy period of operational challenges.”

Following the rather sombre update, Rolls-Royce shares dropped by 8.98%, down to 115.60p a share 11/12/20 12:30 GMT. The Marketbeat community issues a 70.54% ‘Underperform’ rating on the stock, while analysts give the stock a consensus target price of 393.17p a share, and a Hold stance.

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