First-half revenue came in at £11.3bn (£10.3bn expected), up 26% on an organic basis, driven by strong growth across Civil Aerospace, Defence and Power Systems.
Underlying operating profit soared by 46% to £2.5bn (£1.9bn expected), with the beat driven by better-than-expected top-line growth and improved margins across all three businesses divisions.
Free cash flow rose by 24% to £2.0bn (£1.2bn expected). The net cash position improved from £1.9bn to £2.1bn.
Full-year guidance has been raised, with underlying operating profit now expected to land between £4.7-4.9bn (previously: £4.0-4.2bn). Free cash flow is now expected to be between £3.8-4.0bn (previously: £3.6-3.8bn).
An interim dividend of 6.0p per share was announced, up 33%. To date, £1.4bn of the three-year £7-9bn share buyback programme has been completed.
The shares rose 3.4% in early trading.
Our view
Rolls-Royce delivered another set of high-flying results, including a significant upgrade to full-year guidance. All three of its divisions are benefitting from structural growth opportunities, and management continues to execute impressively to capitalise on them. Progress has been so swift that the new 2026 profit guidance now sits at the bottom end of its 2028 targets, leaving room for mid-term expectations to move higher.
Rolls-Royce’s biggest division produces aeroplane engines for larger, long-haul planes. A huge amount of its revenue comes from servicing those engines, with business based on how many hours they spend in the air.
So-called engine flying hours (EFH) are now cruising at 113% of 2019 levels. That figure’s expected to soar somewhere between 130-140% of 2019 levels by the end of 2028. The Middle East conflict hasn’t changed this outlook, with many of the capacity cuts at airlines related to narrowbody aircraft - a segment of the market that Rolls doesn’t operate in.
From an operational standpoint, contract renegotiations, process changes, component upgrades, and increased use of data to drive efficiencies are yielding significant rewards. As a result, margins continue to rise, helping to convert the increased flying hours and revenue into profits.
Rolls also has exposure to the defence sector, bringing in nearly a quarter of group revenue. Given the current elevated-threat environment, defence budgets across many countries are on the rise. With positions in combat aircraft and nuclear submarines, Rolls-Royce looks well-placed to capture some of the increased spending.
The group’s power systems business also accounts for nearly a quarter of revenue. Growth here has been impressive, driven by data centre customers looking for power while awaiting grid connection. With upgrades to grid infrastructure expected to take years, Rolls’ on-site power generation systems look well-positioned to benefit from sustained demand over the medium term.
Despite the positives, some of its newer aircraft engines have required much more maintenance than customers are happy with. Upgraded parts are now being fitted to the affected engines, and early data looks promising. But if the group can’t iron out these issues over the long term, it could eat into future profits.
The balance sheet is in good shape, and cash generation continues to improve. That’s given management the confidence to press ahead with its three-year £7-9bn share buyback programme. But as always, no shareholder returns are guaranteed.
High expectations for growth have earned Rolls a premium versus its peers. The valuation isn’t as attractive as it once was, but with a growing reputation for overdelivering, there could still be some upside to current guidance. However, there’s a decent amount of execution risk, and any slipups are likely to prompt a poor market reaction.
Environmental, social and governance (ESG) risk
The aerospace and defence sector is high-risk in terms of ESG. Product governance and business ethics are key risk drivers. Carbon emissions from products and services, data privacy and security and labour relations are also contributors to ESG risk.
According to Sustainalytics, Rolls Royce’s management of ESG risk is strong.
It has set up a safety, ethics & sustainability committee to oversee ESG issues and executive compensation is tied to performance on these issues. There is also a strong environmental policy, including a commitment to net zero and interim targets, and whistle-blower programme. However, ESG-related disclosure falls short of best practice.
The author holds shares in Rolls-Royce.
Rolls-Royce key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.