Rolls Royce shares, time to sell? Trent 900 hit will last at least 18 months

In the first half of 2010 Rolls Royce had revenues of £5.421 billion with a PBT of £465 million (8.6%) of revenues. Cash position was strong with net cash for the period at £915 million. But it looks less impressive considering the order backlog of £58.4 billion. How much of the net cash was due to order down-payments is not clear. Orders received during the period were £5.9 billion (and backlog was virtually unchanged) and this would have provided net cash of around £550 million. So operating cash flow (excluding financial posts) was probably only £350 million.

The Trent 900 debacle will probably eat up at least £200 million – and perhaps more – over the next 12 -18 months. The immediate effect will also be the loss of some expected orders and 22 A380s – bought by Qatar Airways, Kingfisher, Etihad and Air Austral – are yet to decide whether to use the Trent 900 or the rival GP7200 made by the GE / Pratt & Whitney Alliance. Any loss of market share will be difficult to recover. To sell the 100 additional engines that will be needed to recover the costs of this fix will take a few years. Even though all the costs will not be incurred in this quarter, some significant provision will have to be made this year (and it will be a real warning sign if such provision is not made).

The financial and technological position of Rolls Royce is strong and they should be able to make the fix and weather the storm. But profits will be hit hard for at least the next 12 months and perhaps even longer if Trent 900 sales suffer or if the Trent 1000 is further delayed.

Until the Trent 1000 is established in the Dreamliner (which depends on the Boeing 787 coming into service through next year), Rolls Royce share value is capped and with a big downside. It is perhaps time to sell and it could be time to re-enter in about 12 months if some of the major uncertainties are resolved by then.

ROLLS-ROYCE Share Graph

ROLLS-ROYCE Share Graph: graphs.lse.co.uk

 

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One Response to “Rolls Royce shares, time to sell? Trent 900 hit will last at least 18 months”

  1. EASA eases safety inspections for A380′s Trent 900 engines « The k2p blog Says:

    […] It would seem that the initial failings of the Trent 900 have now been found and are being rectified. But it needs a few more months of operation before it can be said that all the “teething” problems of the Trent 900 have been identified and resolved. The costs for the fix – mainly to be borne by Rolls Royce – have still to be added up an… […]

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