Rolls-Royce Holding PLC (LON:RR) (LSE:RR.L) has released an update on recent trading which shows that it is making good progress with its 2016 strategic priorities. Rolls-Royce’s outlook for 2016 is unchanged and the transformation programme is on-track. Rolls-Royce is now expected to record cost savings at the top end of the £150 million – £200 million target range. Key to this has been Rolls-Royce’s significant changes to its senior management headcount, with key appointments having been made.
Rolls-Royce’s near term market outlook is mixed. This could lead to a degree of volatility in Rolls-Royce’s share price in the short run. However, Rolls-Royce’s long term order book remains at near record levels. This bodes well for the company’s long term progress and in my view shows that it has significant long term growth potential. When combined with Rolls-Royce’s cost savings, this could mean that the company’s profitability improves over the long term.
Rolls-Royce’s free cash flow is still expected to be in the range of £(100) million – £(300) million for the full-year. Its transactional foreign exchange benefits from weaker sterling and life cycle cost reductions are expected to more than offset the higher engineering and programme costs which it is encountering in Civil Aerospace.
In 2016, Rolls-Royce has outperformed industrial peers BAE Systems plc (LON:BA) and Royal Mail PLC (LON:RMG). It shares are up 29% versus a gain of 19% for BAE Systems and 11% for Royal Mail. However, Rolls-Royce has lagged industrial peer Fenner plc (LON:FENR). Fenner has risen by 74% year-to-date.
In my view, Rolls-Royce has long term investment appeal. It is making progress with its cost saving programme and has a strong portfolio of differentiated products. Although challenging operating conditions in the short run could hurt its performance, I believe that over the coming years it will perform well versus the wider industrials sector.