Rolls-Royce turns bullish on management’s optimistic view

Following the poor fiscal 2016 first-half results, the share price of the top-end car and aero-engine manufacturing company Rolls-Royce Holdings Plc (RR.LS) dropped about 20% to £700 in the second-week of September.

After a brief period of consolidation, to the surprise of market participants, the stock has started rising.

However, a look at the management’s view of the second-half of 2016 and the recent developments pertaining to the company reveals that the stock is reflecting the fundamentals perfectly. Rolls-Royce ended Monday’s trading session at £785.50.

The Derby, United Kingdom-based company reported H1 2016 net loss of £2.15 billion or 96.72p per share on revenue of £6.462 billion. In the similar period last year, Rolls-Royce posted profit of £310 million or 19.51p per share on revenue of £6.37 billion.

Rolls-Royce Motor Cars

Excluding the one-time financing cost, underlying profit was £104 million or 4.20p on revenue of £6.143 billion. In the prior-year similar period, the underlying profit was £439 or 18.30p on revenue of £6.256 billion. The analysts had expected the company to post revenue of £6.12 billion. The semi-annual underlying profit (after-tax) of £77 million was better than the £19 million losses anticipated by the analysts.

The company is struggling due to a worldwide economic slowdown. Since 2014, the company has issued a profit warning five times. Furthermore, Rolls-Royce was also slapped with a credit downgrade by the S&P earlier this year. However, the management is hopeful of recovering in the second-half of fiscal 2016.

Due to the initiatives taken by the company, the time needed to build engines for Boeing 787 Dreamliner jets has come down by 25%. Similarly, the time required to build engines for Airbus A350 plane is also expected to come down by 50%.

Rolls-Royce has also undertaken cost-cutting initiatives to increase the bottom line growth. The company plans to trim the 25% of the 2000 managereal positions before the end of 2016. Nearly, 270 management level staff has departed already and another 130 are expected to leave before the year end.

The restructuring program is expected to save between £30 million and £50 million in 2016. Additionally, Rolls-Royce anticipates saving up to £200 million next year.

In July, the company received a $216 million order to deliver F-35B LiftSystems. Following the receipt of the official certification for Trent 1000 TEN engine from the European Aviation Safety Agency (EASA), the company received a $900 million contract from the Gulf Air. A month later, the company won a $1.5 billion Trent 700 order from the China Eastern Airlines. At the end of the first-half of 2016, Rolls-Royce had a minimum order backlog of £70bn.

In the first-week of September, Rolls-Royce sold its fiftieth B33:45 engine, which is the latest of its kind. Thus, fundamentally, considering the orders and the management’s outlook, we have an optimistic view of the stock.

The share price of Rolls-Royce is trading above the 50-day moving average of 741.80. The stock also has a firm support at 725. The ascending stochastic oscillator underlines the existing bullishness in the stock. Thus, we expect the stock to rise to a high of 825, where the next resistance exists.

So, a binary trader can pick a one touch call option to realize a profit from the impending rise in the price of the stock. The target level for the call option should not be more than £825. On the other hand, the expiry date can be any time after the end of the first week of November.

Chad Simmons

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