Aero-engine maker Rolls-Royce (RR.) has shot to the top of the FTSE 100 leader board on Monday after unveiling the sale of a technology business. But that’s not saying very much on an otherwise desperately quiet day on the London stock market.
Shares in the £16.2bn plane engines designer and manufacturer are trading at 883p in mid-morning on Monday (9 April), making gains of less than 2%.
The next best FTSE performer is distribution and outsourcing firm Bunzl (BNZL), up 1.4% after a fund upped its stake in the business.
CASH BOOST FROM UNWANTED BUSINESS
The Rolls-Royce deal will see the company sell its fuel injection technology business L'Orange to America's Woodward for £610m. The sale is expected to complete by the end of this year's second quarter, or 30 June in other words.
Importantly for shareholders, the sale also continues the ongoing streamlining process of Rolls-Royce under chief executive officer (CEO) Warren East. He’s the man that used run ARM Holdings, the UK chip designs champion that was sold to Japan’s Softbank in 2016 for £24.3bn.
‘As well as providing a healthy boost to the balance sheet, it suggests CEO Warren East is not sitting on his hands despite reporting good progress on a transformation of the business at last month’s full year results,’ says AJ Bell investment director Russ Mould.
Shares took a detailed look at East’s strategic plans for Rolls last month, and reached an overall positive conclusion. We like the current focus on efficiency improvement and sharper execution.
STRATEGY RETHINK IS WORKING
We also think East is right to exit the commercial marine business (now up for sale) and shrink the number of divisions from five to three. Putting a lot of development effort into hybrid-electric aero-engines, alongside partner Siemens, should result in prototype aircraft taking early test flights by 2020.
‘East has now been in charge at Rolls for more than two years having previously earned a stellar reputation at British technology champion ARM,’ says AJ Bell’s Mould.
‘His successful rehabilitation of a fallen corporate titan is only bolstering that reputation.’
The key to longer-term progress at Rolls is getting its engines on to more planes, and those planes flying more air miles. That will accelerate the servicing and parts cycle from which the company earns its profit and cash flows.
