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Rolled over

9 Jul 2020 By Ed Cropley

Rolls-Royce is getting worryingly close to maxing out its credit card. The British aero-engine maker is likely to burn through at least 4 billion pounds this year due to airline lockdowns across the globe caused by the pandemic. Extra credit lines provide some relief but look increasingly like bandages over a balance sheet in need of serious surgery.

At first glance, the 5 billion pound engineer, which has lost two-thirds of its value this year, might appear to have put the worst behind it. Engine-maintenance revenue, which made up a quarter of turnover last year, is picking up from an April low of just 20% of normal. That, plus savings like cutting 9,000 jobs or 17% of its workforce, means the 3 billion pounds of cash outflows in the first half of the year should shrink to a mere 1 billion pounds in the second half. And with 8.1 billion pounds of “pro-forma liquidity”, Chief Executive Warren East looks to have a hefty buffer.

Closer inspection of the cushion, however, reveals a worrying absence of plump. Of the total, 4.2 billion pounds is cash. But of that, 2.5 billion pounds is credit that East drew down in March. Lop off that, as well as the 1 billion pounds that Rolls says is likely to disappear in the next six months, and the company may have just 700 million pounds of its own money left by the end of the year.

That’s cutting it fine, even if the outlook for 2021 was rosy. And it’s not. Rolls reckons long-haul engine flying hours – which are closely linked to maintenance revenue – will be 70% of pre-crisis levels next year. But there’s no free cash flow guidance until 2022, when Rolls says it should have recovered to at least 750 million pounds.

That points to East hammering the corporate credit card even harder in the interim – unless he finds the cash from elsewhere. Apart from asset sales, his options are shareholders or, in extremis, the government. JPMorgan analysts estimate Rolls needs 6 billion pounds of new equity – a huge 120% of its current market value. Don’t rule out a great British company having Great Britain as a shareholder before too long.


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