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Stocks in Focus: Rolls-Royce

This week I am looking at the British engineering giant Rolls-Royce, following its annual results last week. I last wrote about Rolls-Royce in January, after it made the announcement that it would restructure its five divisions into three core operating units - a decision that was welcomed by investors. The annual results have come as further good news, with the cost-cutting drive that included the restructure helping the company to return to profit, following its largest ever pre-tax loss in 2016.

The results came in ahead of prior expectations, with the company making £4.9bn in pre-tax profits in 2017.  £2.6bn of this came from non-cash gains on its foreign exchange hedging strategy, thanks to a strengthening sterling. The operating performance was also positive, with underlying revenues increasing by 6% to £15.1bn. 

Despite the encouraging results, the year has not been without difficulties for the company. Technical problems were found with its Trent 1000 jet engines, used to power Boeing’s 787 Dreamliner, and some of its Trent 900 engines, resulting in them wearing out more quickly than expected. The issues cost the company £170m in 2017, with management forecasting an increase in cost to a peak of £340m in the coming year. However, CEO Warren East has reassured investors that the problems will be fully resolved by 2021-22.

Although the engine fault issues will continue to be costly for the company over the next 5 years, Mr East continues to look for opportunities to cut costs in other areas. Two years after making initial cuts to management, a further restructure is under way that should result in significant cost savings. Mr East has also reassured investors that the ambitious promise of £1bn free cash flow by 2020 is still possible, which will be impressive if achieved.


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