Rolls Royce (LON: RR) (OTCPK: RYCEF) shares have jumped 21% in London this morning. RR jumped on the back of their updated numbers. The assumption is being made that Rolls Royce is finally back. Which, after the tribulations of the past few years would be a welcome change of course.
There are two specific parts to the new numbers: “Strong first half results helped by transformation: For the first half of 2023, we now expect underlying operating profit of £660m-£680m. This performance reflects continued revenue growth across all three main divisions coupled with early transformation benefits, notably commercial optimisation, cost efficiencies and focused investment across the Group.” This is a trading update so that's a forecast - but a pretty accurate one - of how they expect that first half set of results to turn out.
The other part is perhaps more important: “Full year guidance raised: we now expect underlying operating profit of £1.2bn-£1.4bn (consensus: £934m) and free cash flow of £0.9bn-£1.0bn (consensus: £732m) in 2023, helped by early transformation benefits” The future's going to be even better.
Rolls Royce share price from London Stock Exchange
A share price is, theoretically at least, the net present value of all future income from that share. This is why there's such a leverage to better results. Because the assumption is that the good results this year will be the starting point for next - which even if they don't rise dramatically again will rise at least in part from that new baseline. It might not be quite true but the assumption is that profits at Rolls Royce are not going to be higher, forever.
As to what really killed RR shares during lockdown. Yes, of course grounded airlines weren't going out there and buying new engines. But that's not really where Rolls Royce makes its profits. It's the maintenance revenue that matters. And that is charged on an hourly rate - per hour the engine spends in the air. So, no flying, no such revenue. Which is what really tore a hole in revenue, required the rescue rights issue and so on.
What appears to be happening now - and it is civil aviation leading this return - is that such revenues are back to where they should have been without the interruption. So, we can in fact say that Rolls Royce is back - finally. Which is why the 20% and more bounce in RR shares, of course.
