Rolls-Royce (RR.) chief executive Tufan Erginbilgiç highlighted higher operating margins across all three of its main divisions, driven by “commercial optimisation and simplification”.

Half-year revenue rose by nearly a quarter to £11.3bn, while the higher margins meant underlying operating profit jumped by 46 per cent to £2.5bn. Free cash flow generation also rose by 24 per cent to £2bn.

This led the company to upgrade full-year guidance. Underlying operating profit is now expected to be about 15 per cent higher than previous targets, and free cash flow 5 per cent above.

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Rolls-Royce Holdings PLC

20 days

The commercial aerospace arm continues to be the driving force. Like its engine-making peers GE Aerospace (US:GE) and Safran (FR:SAF), Rolls-Royce has benefited from significant supply-chain disruption. This has placed new engines at a premium and forced airlines to fly older engines for longer, which means they’ve had to spend more on maintenance. Safran’s chief executive Olivier Andriès described after-market conditions as “stellar” on its earnings call earlier this week.

Airline bosses are less pleased with delays but it’s clear that for now, engine makers have the whip hand. Erginbilgiç told analysts that Rolls-Royce had managed a three-percentage-point improvement to its contract margins, which “is mainly driven by new contracts coming in with better profitability”.

Margins on long-term supply agreement (LTSA) deals also increased by one percentage point. Erginbilgiç argued that uplifts on these can be sustained, adding that “even by 2028 only half of our in-production LTSA contracts will be on new commercial terms”. The civil aerospace arm’s operating margin remains chunky at 25.3 per cent.

The two other divisions also delivered strong growth. Underlying revenue in defence was up 17 per cent, while operating profit jumped by 57 per cent, again on stronger after-market earnings. The power systems business, meanwhile, saw its underlying revenue increase by 28 per cent, underpinned by strong demand for power turbines – especially for data centres. Its underlying profit soared by 72 per cent on the back of an operating margin that rose 5.3 percentage points to 20.3 per cent.

Broker forecasts are robust. The consensus view is that adjusted earnings per share will compound at more than 17 per cent over the next five years. As with GE, though, our concern remains that this is more than priced in. The shares trade at 29 times forecast earnings, and a PEG ratio approaching 2.4 suggests a valuation that looks toppy. Hold.

Last IC view: Hold, 1,395p, 26 Feb 2026

ROLLS-ROYCE (RR.)   ORD PRICE:1,457pMARKET VALUE:£ 121bnTOUCH:1,456-1,457p12-MONTH HIGH:1,533pLOW:  981pDIVIDEND YIELD:0.8%PE RATIO:40NET ASSET VALUE:34p*NET CASH:£2.17bnHalf-year to 30 JunTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)20259.494.8452.44.5202611.41.9319.36% change+21-60-63+33Ex-div:6 AugPayment:18 Sep* includes intangible assets of £4.6bn, or 55p a share