Will Rolls-Royce Holding PLC Outperform BAE Systems plc, Royal Mail PLC, GKN plc And Weir Group PLC After £4.6 Billion Loss?

Are shares in Rolls-Royce Holding PLC (LON:RR) (LSE:RR.L) more appealing than BAE Systems plc (LON:BA) (LSE:BA.L), Royal Mail PLC (LON:RMG) (LSE:RMG.L), GKN plc (LON:GKN) (LSE:GKN.L) and Weir Group PLC (LON:WEIR) (LSE:WEIR.L) after results?

Rolls-Royce Holding PLC
Rolls-Royce Holding PLC

Rolls Royce Holding PLC (LON:RR) (LSE:RR.L) has released full-year results to investors today. Although revenue increased 9%, its loss before tax was £4.6 billion. This reflects a non-cash impact of a £4.4 billion period-end mark-to-market revaluation of the company’s derivatives. It also includes a £0.7 billion charge for financial penalties from agreements with investigating bodies.

Investors may be encouraged by the company’s good free cash flow performance, which was led by working capital improvements. However, on an underlying basis revenue was 2% lower at constant forex, which reflected the weakness in Marine. Underlying profit before tax was 49% lower at constant forex.

Rolls-Royce’s transformation programme is well underway. Over £60 million incremental in-year savings were registered in 2016. It expects a further £80-110 million in-year benefits in 2017. It is also on track for the £200 million annualised run rate by the end of 2017. Its goal is modest performance improvements, with free cash flow targets similar to those from 2016. The completion of the ITP acquisition is expected in mid-2017.

In terms of dividend investment, Rolls-Royce has maintained its final dividend payment at 7.1p per share, which gives a full year dividend of 11.7p per share. This is in line with changes announced in February 2015.

Shares in Rolls-Royce have fallen 3% so far today. However, in the last month the company’s stock price has risen 11%. That’s ahead of the performance of shares in industrial peers BAE Systems plc (LON:BA) (LSE:BA.L), Royal Mail PLC (LON:RMG) (LSE:RMG.L), GKN plc (LON:GKN) (LSE:GKN.L) and Weir Group PLC (LON:WEIR) (LSE:WEIR.L). Royal Mail is down 9%, Weir is 2% lower, BAE’s shares are flat and GKN’s stock price is up 1%.

In my view, Rolls-Royce has investment appeal for the long term. I think its transformation programme will improve the company and make it more investable. However, I equally think the near term will be tough, although this could be eased by positive forex adjustments. I’d rather own BAE due to its more stable performance and Royal Mail is still a good dividend stock in my view. However, I think Rolls-Royce could be a better investment than GKN and Weir due to its potential for a turnaround.

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