Rolls Royce Holdings Plc (RR.) Ordinary 20p Shares

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Rolls-Royce reported full-year revenue of £20.1bn (£19.9bn expected), up 14% on an organic basis. All three core divisions were in growth territory.

Underlying operating profit soared 38% higher to £3.5bn (£3.3bn expected) . Profitability improved across all divisions, with a particularly strong uplift in Power Systems driven by scale benefits and a favourable product mix.

Free cash flow rose by £0.8bn to £3.3bn. The net cash position improved from £0.5bn to £1.9bn.

In 2026, underlying operating profits are expected to land between £4.0-4.2bn, 11% ahead of market expectations.

Mid-term (2028) guidance has been upgraded, with underlying operating profits and free cash flow expected to reach £4.9-5.2bn and £5.0-5.3bn respectively. Both measures were ahead of expectations.

A final dividend of 5p takes the full-year total up by 58% to 9.5p. A new three-year £7-9bn share buyback programme was announced.

The shares rose 6.2% in early trading.

Our view

Rolls-Royce continues to deliver, with results coming in better than expected across the board. The outlook is just as favourable, leading the group to upgrade its mid-term targets (2028) for a second time. Alongside a new £7-9bn share buyback programme, the shares reacted positively on the day.

Rolls-Royce 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 those engines spend in the air.

So-called engine flying hours (EFH) are now cruising at 111% of 2019 levels. That figure’s expected to soar somewhere between 130-140% of 2019 levels by the end of 2028 as more of its engines take to the sky and demand for long-haul travel remains strong.

From an operational standpoint, contract renegotiations, process changes, component upgrades, and increased use of data to drive efficiencies are reaping plenty of rewards. As a result, margins are continuing to rise, helping to convert the increased flying hours and revenue into profits.

Rolls also has exposure to the defence sector, making up around 25% 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 around 25% 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. Attempted fixes are in the pipeline, but if the group can’t iron out these issues, it could eat into future profits.

Rolls reckons it can fully offset the direct impact of tariffs on its business. But the indirect impact could see some weakness among its customers, and that’s largely outside of the group’s control.

The balance sheet looks much stronger than it has for some time. That’s given management the confidence to significantly increase dividend payments and start a 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 if management can’t deliver improvements on time, markets are likely to react poorly.

The author holds shares in Rolls-Royce.

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.

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.

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