Investment Thesis:
- Very high barriers to entry and Covid-19 is likely to improve industry structure (consolidation)
- Consumer pent up demand for travel will return with a vaccine.
- Liquidity concerns have been addressed with the GBP5bn recapitalization program.
- Ongoing focus on R&D and innovation, which will drive further efficiencies.
- Cost efficiency program to drive savings to support earnings.
Key Risks:
- Covid-19 impacts are deeper and more protracted than expected.
- The Company fails to hit its near-term guidance.
- Defense and Power Systems fails to deliver organic growth.
- Economic downturn leading to reduced demand from airlines.
- Brexit uncertainty.
- Adverse currency movements outside hedging strategies.
- Regulatory / litigation risks.
Key Highlights:
- Revenue growth of low-to-mid single-digit, supported by a strong order book cover in both Defence and Power Systems and a continuation of gradual improvement in Civil Aerospace, along with an expected increase in spare engine sales, with long-term revenue growth driven by technology and innovation opportunities and rising global demand for sustainable power.
- Operating profit margin to be broadly unchanged as underlying operational improvement is balanced with increased engineering spend to develop sustainable growth opportunities, with a gradual shift in spend towards New Markets, Defence and Power Systems, with an aim to spend ~75% of R&D investment on lower carbon growth opportunities in the medium term.
- FCF to be modestly positive, representing a substantial improvement on pcp, despite the concession slips.
- Balance sheet repair commenced with £2bn in proceeds from disposals (ITP Aero is progressing well and expected to complete in 1H22) together with strong underlying FCF generation to be used to reduce net debt (including leases was up +44.4% over pcp to £5.2bn and excluding leases was up +126.7% over pcp to £3.4bn) with the aim of returning to an investment grade credit profile in the medium term.
- Strong liquidity position of £7.1bn, including £2.6bn in cash (post payment of €750m bond and the £300m Covid Corporate Financing Facility commercial paper) and £4.5bn in undrawn committed facilities.
- No dividend payment for the year as some of loan facilities place restrictions and conditions on payments to shareholders, however, the Board will start recommending shareholder payments from FY23.
- The restructuring program delivered £1.3bn run-rate savings target a year ahead of schedule, reducing the size of Civil Aerospace business by around a third and removing more than 9,000 roles from continuing operations, with focus now on ensuring the benefits are sustained.
Company Description:
Rolls Royce Holdings plc (RR) manufactures aero, marine and industrial gas turbines for civil and military aircraft. The Company designs, constructs, and installs power generation, transmission and distribution systems and equipment for the marine propulsion, oil and gas pumping and defense markets. The Company operates three main segments: (1) Civil Aerospace; (2) Defence Aerospace; and (3) Power Systems.
(Source: Banyantree)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
