Rolls-Royce Holdings Plc – Operating with Positive Momentum and Strong Liquidity

Rolls-Royce Holdings Plc (LON: RR.) is a London, United Kingdom-headquartered multinational engineering Company. It focuses on power and propulsion systems.

The Company will announce H1 FY2020 results on 27 August 2020.

Update on Trading Performance for H1 FY2020 (9 July 2020)

In the first half of the financial year 2020, Widebody engine flying hours (EFH) fell by around 50% versus the same period last year, while EFH had fallen by 75% in the second quarter. Revenue in power system had declined by a low double-digit per cent, driven by a disruption in industrial markets, which is expected to recover by the end of 2021. The Group’s defence business remained resilient and had suffered no disruption as a result of the pandemic. In the first half of 2020, the free cash outflow stood at £3 billion, reflecting £1.1 billion of one-time impact from the cessation of invoice factoring and £1.1 billion of reduction in receipts from EFH and engine deliveries. The Group was on track to deliver £1.0 billion in cost savings for 2020 and achieved around £300 million in H1 FY2020. The Group has liquidity of £8.1 billion (Pro-forma basis) comprising commitments for a new five-year term-loan facility of £2 billion and an undrawn revolving credit facility of £1.9 billion.

Share Price Performance


Daily Chart as of July 29, 2020, before the market close (Source: Refinitiv,Thomson Reuters)

Rolls-Royce Holdings Plc shares were trading at GBX 267.00 at the time of writing before the market close (at 12:50 PM GMT+1) on 29 July 2020 and up by 1.68% versus the previous day closing price. Stock 52 week High and Low were GBX 893.91 and GBX 235.50, respectively.

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Key Risks

COVID-19 is causing substantial disruptions to the respective supply chains and the end markets, while the customer demand is dwindling as activity levels have reduced. The Group is exposed to a number of market risks, some of which are of a macro-economic nature such as, fluctuations in foreign currencies, oil prices, and interest rates.

Valuation Methodology

Conclusion

The Group expects a gradual recovery in the business performance in coming months, due to ease in the travel restrictions. In H1 FY2020, EFH has declined and is expected to decline by around 55% in the full year versus 2019 levels.  RR is on track to deliver cost savings of £1.0 billion in the financial year 2020 and achieved approximately £300 million in the first half of the financial year 2020. The Group anticipates a £4 billion of free cash outflow in the full year. The Company has a substantial amount of liquidity to emerge strongly in the long run. Overall, the Group stays positive about the long-term outlook for sustainable power solutions and expects at least £750 million of free cash flow in 2022.
Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance at the current price of GBX 267.00 (as on 29 July 2020, before the market close at 12:50 PM GMT+1) and will recommend fresh buying at the right time.

 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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