Rolls-Royce shares surge as CEO’s transformation starts to pay off

Rolls-Royce shares surged on Wednesday after the group upped its annual profit forecast by 45 per cent.

Boss Tufan Erginbilgic, who previously described the business as a ‘burning platform’, told investors on Wednesday his transformation plan had started to pay off.

The FTSE 100-listed aeroengineer benefited from operational improvements, increased military spending and a recovery in long-haul flying.

Radical plans: Rolls-Royce boss Tufan Erginbilgic is shaking up Rolls-Royce 

Shares in the British company jumped 24 per cent to 190p, marking the highest level since the start of the pandemic in March 2020.

The group said it now expected profit this year of between £1.2billion and £1.4billion, up from its previous guidance of between £800million and £1billion. The market had been forecasting £934million.

Boss Tufan Erginbilgic, who joined the company in January, said his turnaround had started well, with progress already evident across the company.

He said: ‘Despite a challenging external environment, notably supply chain constraints, we are starting to see the early impact of our transformation in all our divisions.’

Bernstein analysts said the primary driver of the better first-half and full-year performance was improved operations, a key priority for Erginbilgic.

The group, whose engines power the Airbus A350 and Boeing 787 long-haul jets, said underlying operating profit for the first six months would come in at just over twice the market expectation of £328million.

A large slice of Rolls-Royce’s revenue is tied to the hours flown by its engines, a model that plunged it into crisis when planes were grounded during the pandemic.

A rebound in flying, however, is now benefiting the group, as is increased defence spending due to the war in Ukraine.

On defence, the company, said: ‘We expect first half underlying operating profit in the region of £260million compared to £189million in the prior period. 

‘This was driven by strong revenue growth and higher margins. 

‘Revenue growth reflected increased underlying demand and a more even delivery profile between the first half and second half of the year than in 2022. Higher margins were driven by higher revenues, pricing actions, a more favourable product mix and cost efficiencies.’

Spend boost: Higher defence spending amid the war in Ukraine has helped boost Rolls-Royce

The group expects to produce up to £360million of free cash flow for the six months to the end of June, beating a £50million forecast, and it could produce as much as £1billion of cash in the full year.

Michael Hewson, chief market analyst at CMC Markets UK, said: ‘Even before today’s trading update the Rolls-Royce share price has been one of the best performers on the FTSE100 so far year to date.’

He added: ‘The turnaround in the shares since the start of the year has been remarkable, even more so given the comments from new CEO Tufan Erginbilgic at the end of last year when he labelled the company as a “burning platform”.

‘Despite this description investors have ploughed back into the company after seeing a modest return to full year profit before tax of £206million, at the end of last year, after the £1.5billion losses of the previous year.’

Even before today’s trading update the Rolls-Royce share price has been one of the best performers on the FTSE100 so far year to date.

Rolls-Royce will publish its first-half results on 3 August. 

This post first appeared on Dailymail.co.uk