Rolls-Royce shares increased significantly on 2022’s full-year results. Should we anticipate the same thing when the first half of 2023 comes to a close?
This was brought on by the 2022 FY results. or, to be more precise, that Rolls kept its promises.
We were told to anticipate good cash flow in the second half, and we did. After a financial deficit of £1.5 billion the year before, we witnessed a free cash flow of £505 million.
Will there be more advancement this year? H1 results for 2023 are due in the first few days of August. And much could hinge on what they own.
Investors are likely to be searching for a few important factors, in our opinion. However, we do not really anticipate anything exciting.
2023 prospective
Rolls-Royce shares have remained true to its preliminary 2023 projection.
This comprises a £0.8 billion to £1.0 billion underlying operating profit. Free cash flow forecasts range from £0.6 billion to £0.8 billion, which is not much more than in the turnaround year of 2022.
Will people raise the price of Rolls-Royce shares if the company fulfills its promise, though? Due to a few factors, we are unsure if it will.
For starters, the company claims that its cash flow should favor the second half. This suggests that the H1 figure would appear a little underwhelming. For any significant change in the share price, we believe that the full-year outlook would need to be upgraded.
Debt
Debt, a significant share price deflator, is the additional factor. One important thing was accomplished by the 2022 positive cash flow. It allayed worries that Rolls would still require financial assistance to survive.
In actuality, the company paid down about £2 billion in debt during the year. And there will undoubtedly have been a lot of relief after that. But is it enduring?
The 2022 debt repayment was largely funded by sales. Beginning in 2023, debt repayment must be funded by profits and cash flow.
And so far this year, we have not heard a lot about how it is going.
Long-term change
We believe there is one crucial factor that needs to happen for Rolls-Royce shares to start a new bull run and continue it. And now you can see more clearly how the business will develop over time.
Despite its claims, Rolls is still very much in the process of transition. The board announced at the AGM in May that their strategic review is proceeding as planned and that, as previously stated, they will share the results and medium-term objectives in the second half of 2023.
The H1 update may contain some hints. However, it appears that we still have some time to wait before we can observe how the flesh will cover the bones.
Why keep an eye on Rolls-Royce shares before the half-year results
Just over three weeks remain until the release of the half-year results, so it makes sense to plan ready for any prospective news and possible reactions. Given that Rolls-Royce shares have been stagnant in recent months — ever since the significant surge in Q1 — this is particularly crucial. The future results may signal a significant upward or downward shift.
Finances as of now versus the budget
The growth stock increased back in February as a consequence of the confidence surrounding the 2022 results and what it would signify for this year. Over the past year, the stocks have increased by 70%. Operating profit increased significantly to £652 million last year, and it is anticipated that it would rise even more to £0.8 billion to £1 billion by 2023.
The company stated that it was still on pace to accomplish this goal in the trading report for May.
We think that whether or not this guidance is sustained will be a crucial factor in the half-year outcomes. It would be excellent news if it held true to the projections. That not only demonstrates ongoing profitability, but it also demonstrates that the management team’s claims may be taken seriously.
Transformational development
The proposed transformation program, according to the new CEO, Tufan Erginbilgic, will boost our effectiveness and commercial results, he said in February.
There are times when management might be found talking about a change in strategy or a significant transformation of a firm without actually taking many actions. The next results will offer the ideal platform to assess whether the CEO has seen the results of what he discussed.
It is a huge business, to be sure. But are we already observing savings from the reorganized Civil Aerospace division? Does simplifying operations result in an increase in free cash flow? Investors are likely interested in learning what has changed (or become worse) throughout this time.
The debt situation
The degree of debt is the last factor that we believe will have an effect on the share price. Over the previous 18 months, the company has significantly reduced its net debt amount. Large asset sales that were utilized to pay off borrowings in part are to blame for this.
Net debt as of the end of the previous year was £3.25 billion. The debt-to-EBITDA ratio is 2.47, which is lower than the standard upper limit of three. However, we believe it should be decreased much more, ideally as part of a deliberate plan to pay off additional debt this year.
The company will undoubtedly make some sort of announcement regarding debt levels. Investors will be able to decide for themselves whether the current level of borrowings is acceptable or if it could cause issues based on the posture and tone of what is said.