Rolls-Royce said it would exceed its 2020 guidance as it announced new
ambitious mid-term goals, sending its shares to four-year highs and reflecting investor faith that CEO Warren East can transform Britain's best known engineering firm.
The maker of engines for civil planes, military jets and ships has been in turnaround mode since 2015. Having on Thursday announced plans to cut 4,600 jobs as part of cost-saving measures, it told shareholders on Friday the foundations were in place for it to deliver higher returns in future.
Rolls said it was well placed to exceed a target of generating free cash flow of 1 billion pounds ($1.3 billion) by 2020. In the mid-term it is aiming for free cash flow per share to exceed 1 pound, up from 15 pence per share it made in 2017.
Shares in Rolls traded up almost 10 percent at 968 pence at 0920 GMT, having earlier hit their highest level for four years, showing investors belief that
East can deliver.
The former boss of chip designer ARM,
East, took over Rolls three years ago when the company was laid low by multiple profit warnings due to declines in the oil price and older aero-engine programmes.
His plan, to simplify the company and make it more efficient, has been taking shape over the last three years, with the most radical action taken on Thursday when he announced job cuts designed to save 400 million pounds a year by 2020.
That programme was about bringing simplicity to the company, said
East, who told the investor day on Friday that making Rolls more simple was key to its transformation.
"Thinking about...the people, the as
sets, and the money, those are key to create the outputs which is market leadership and strong financial performance," he said.
Despite Rolls's confidence, the engineering company remains under pressure in the near term from airline customers due to ongoing issues with parts not lasting as long as expected on the Trent 1000 which powers the Boeing 787.
The new targets would represent the culmination of
East's turnaround of the company, and are designed to answer critics who have long said that Rolls underperforms rivals such as GE, which are more profitable.
The higher free cash flow target also raises the prospect of a bigger payout for shareholders after the dividend halved in 2016. Since then Rolls has said any improved shareholder returns will be linked to its free cash flow performance.
The jump in the share price reflects the material upgrade to consensus figures implicit in the new targets, said analysts.
Jefferies analyst Sandy Morris said that free cash flow per share of over 1 pound, was equivalent to total free cash flow of 1.9 billion pounds.
"It's told us that in the mid-term, that's about four years or five years, it (Rolls) can do 1.9 billion pounds. If it does that then it's a cheap stock," he said.
Morgan Stanley analysts praised the company and its leadership, saying the new targets showed a "ruthless focus on optimising investment" and "the emerging benefits of increased focus and rigour".
Power Systems East's plan has involved dividing the company into three business units, Civil Aerospace, Defence and Power Systems, with the latest restructuring designed to remove management duplication between the three new units.
Rolls on Friday also showcased its often-overlooked power systems unit, saying that the business will drive some of its future growth by achieving revenue growth of 3 to 5 percent above underlying GDP, and an operating profit margin in the mid-teens, up from 11.3 percent in 2017.
Power systems makes high and medium-speed diesel and gas engines that are used on ships, yachts, trains, trucks, mining, nuclear power stations and in providing back-up power for data centres and hospitals.
Rolls said on Friday the Trent engine issue could lead to additional cash costs of 100 million pounds in 2018, but that it was sticking to guidance for this year's free cash flow to come in at about 450 million pounds, give or take 100 million pounds.It said it would be able to offset those costs through "short-term discretionary cost mitigation actions".