Rolls Royce Group plc Ordinary 20p (RR.)

Company overview

The group's core function is the provision of power systems for land, sea and air. Rolls Royce operates in four global markets: Civil Aerospace, Defence Aerospace, Marine and Energy. Group products include aircraft jet engines, pipeline compressor systems, bearings, motion control, electrical systems and over 50,000 gas turbines in service worldwide. A broad customer base includes over 500 airlines, 4,000 corporate and utility aircraft and helicopter operators, 160 armed forces and some 70 navies.

HL Update (24 July 2008)

The group’s recent half year results (24July08) proved broadly reassuring. The order book increased by 17pc to £53.5 billion (2007: year end £45.9 billion), whilst overall group adjusted sales increased by 12pc to £4.21 billion. The company’s push towards recurring service revenues continued to show momentum, with the figure up another 12pc and representing over half of group sales (53pc).  Furthermore, management remained confident that profitable growth and positive cash flow could be delivered over the course of the full year period.

On balance, despite broadly encouraging results, concerns do remain - the highly cyclical airline industry is back in another downturn and fears for the mothballing of aircraft remain. Furthermore, the group’s pension fund still has issues and with rising metal prices over recent years, costs remain a concern. However, management have learnt harsh lessons from previous downturns, from which, the business model has been made significantly more robust. On balance, market consensus opinion remains a hold.

HL Comment (7 February 2008)

While the name was once synonymous with the famed Rolls Royce cars, Rolls Royce Group PLC parted company with the car manufacturer back in 1971. This major aero-engine manufacturer came to the stockmarket via a wave of privatisations back in 1987 and the ride has been a volatile one for such long term investors. Companies with close links to the airline industry have had to endure such mammoth events as the terrorist attacks of 9/11, two Gulf wars and the Sars virus. However, Rolls Royce has been attempting to implement a strategy whereby group products are less exposed to the volatility of new product sales and more akin to after sales servicing.

Recent full year results (07Feb08) saw underlying pre-tax profits rise by 13pc to £800m, as the group’s order book hit a company record of £45.9 billion - the Asia and Middle Eastern order book has more than doubled to £20billion during 2007. A key driver continued to be after sales services, which currently provide over one half of the group’s revenues. Strong after sales revenues have equated to strong cashflow levels, which in turn, have enabled the group to continue raising the dividend - shareholder payments for 2007 have in aggregate been raised by 35pc over 2006. However, whilst the results were generally at the higher end of analyst expectations, some disappointment emanated as the group looked to raise the dividend payment markedly over time instead of providing a one-off payment, as some investors had hoped for.

Acting for negative investor concerns, foreign exchange exposure and historically high commodity prices continue to provide a potential drag. Exposure to the highly cyclical airline industry, despite increasing service revenues, also remains an issue, particularly when set against a more uncertain global economic environment. On the positive side of the equation, the group’s dividend policy remains progressive, management continue to seek further efficiency gains and reduce volatility within the group and the outlook statement accompanying the recent results was broadly positive in tone. On balance, market consensus opinion is currently neutral in tone.

All yield figures are variable and not guaranteed.

Fundamental Data

* Prior to 31st December 2004, figures were stated under UK Generally Accepted Accounting Principles (GAAP). Recent figures stated under International Financial Reporting Standards (IFRS).