Rolls-Royce profit drops on forex loss – Suppliers Share Wrap

A GBP1 billion loss on the fair value of currency contracts has pushed Rolls-Royce to a loss in 1H2010, despite a fair operational performance in 1H2010. The company reported an operating profit of GBP594 million, but losses before tax of GBP475 million, as a result of GBP1,069 in non-cash market-to-market financing losses. Excluding the exchange rate movements, Rolls-Royce reported a underlying profit of GBP465 million in the first half.

Rolls-Royce reports that order activity in many markets remains subdued, but still managed to book GBP5.9 billion in orders in 1H2010. The company reported a 6% increase in original equipment revenue and an 8% increase in overall service revenue. Total revenue grew 5.5% to GBP5,421 million.

The company’s order book grew marginally in the first half of the year, up GBP300 million to GBP47.3 million. Research and development funding matched 1H2009, totalling GBP436 million, of which the company funded 55%. Full year R&D investment is expected to grow by GBP40-50 million.

The civil aerospace portfolio continues to suffer from “subdued” and “difficult” trading conditions. Rolls-Royce took commercial orders totalling GBP3.3 billion in 1H2001, including 50 Trent and 190 V2500 orders. Another GBP1 billion orders were received at the Farnborough Airshow.

Civil aerospace revenue rose just 0.6% to GBP2,294 million. Original equipment revenues fell 9%, while services revenue were up 7.5%, due to ‘modest’ improvements in demand from airlines. Underlying profit in the civil unit dropped form GBP257 million in 1H2009 to GBP210 million in 1H2010. Lower one-off affects also contributed to the result.

Rolls-Royce’s outlook for 2H2010 is one of recovery, although there is still notable uncertainty and improvements will vary by region. Services revenues are forecast to improve 10-12%, but original equipment manufacturing will see further changes to its product mix and pressure on margins. Underlying profits from the unit are expected to be “modestly lower” in 2010.

The response to the Rolls-Royce result was muted, with prices declining 0.4% at the close of trading yesterday.

Selected Original Equipment Manufacturers daily share price movements (% change): 29-Jul-2010

Selected Aviation Suppliers & Leasing daily share price movements (% change): 29-Jul-2010