Rolls-Royce Raises Full Year Guidance After Strong First Half Performance
Why we think this is good
Rolls-Royce has delivered a strong first half performance, demonstrating significant progress in its transformation efforts. The company reported substantial improvements in key financial metrics, including a 50% increase in underlying operating profit to £1.7bn and a margin expansion to 19.1%. Free cash flow grew to £1.6bn, and the net cash position improved to £1.1bn. These results have led to an upward revision of the full-year guidance, indicating confidence in the company's trajectory. However, it's important to note that challenges persist, including ongoing supply chain issues and the impact of tariffs. The current share price, being close to its 52-week high, suggests that some of this positive performance may already be priced in. While the outlook is promising, investors should remain cautious of external economic uncertainties and the execution risks associated with the ongoing transformation program.
Key Points
- Underlying operating profit up 50% to £1.7bn
- Operating margin improved to 19.1% from 14.0%
- Free cash flow increased to £1.6bn from £1.2bn
- Net cash position improved to £1.1bn from £475m
- Large engine flying hours at 109% of 2019 levels
- Full-year guidance raised for operating profit and free cash flow
- Strong order intake in Power Systems, especially in data centers
- Ongoing challenges from supply chain issues and tariffs
- Transformation program continues to deliver results
- Confident in meeting mid-term targets
Summary
Rolls-Royce has reported a robust first half of 2025, with underlying operating profit rising 50% to £1.7bn and an operating margin improvement to 19.1%. The company saw strong growth in Civil Aerospace and Power Systems, with large engine flying hours reaching 109% of 2019 levels. Free cash flow increased to £1.6bn, and the net cash position improved to £1.1bn. Based on this performance, Rolls-Royce has raised its full-year guidance for underlying operating profit to £3.1bn-£3.2bn and free cash flow to £3.0bn-£3.1bn. The company remains confident in achieving its mid-term targets. However, challenges persist, including ongoing supply chain issues and the impact of tariffs. The current share price of 988p is near the 52-week high of 1,012.72p, suggesting that positive performance may be partially priced in. Broker targets range from 535p to 1,040p, with recent reiterations maintaining positive outlooks.