ii view: Rolls-Royce confident in opportunity for further self-help

AGM trading update

• Large Engine Flying Hours (EFH) of 110% of 2019 levels in the three months to 31 March
• Strong Defence equipment intake
• Strong revenue growth and increase order intake for Power Systems 
• £138 million of a £1 billion share buyback programme executed

Guidance:

• Continues to expect full-year 2025 underlying operating profit of £2.7-to-£2.9 billion
• Continues to expect full-year 2025 free cashflow of £2.7-to-£2.9 billion 

Chief executive Tufan Erginbilgic said: 

"Our transformation of Rolls-Royce is progressing strongly and we continue to expand the earnings and cash potential of the business. We are creating a more resilient and agile Rolls-Royce that is better equipped to respond to changes in the external environment. As a result, we have had a strong start to the year.”

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ii round-up:

Rolls-Royce Holdings (LSE:RR.) operates across the three core divisions of civil aerospace, defence, and power systems. 

The FTSE 100 company has customers in more than 150 countries. They include over 250 commercial large aero engine customers, 160 armed forces and navies and approximately 40,000 active Power Systems customers such as boat builders, industrial manufacturers, utility providers and data centre operators. 

For a round-up of this latest trading update announced on 1 May, please click here. 

ii view:

Founded in 1906, Rolls-Royce returned to the private sector in 1987, floating on the stock market after 16 years of UK government ownership. Today, the London headquartered company employs over 40,000 people. 

Civil Aerospace generated most sales in 2024 at 51%, followed by Defence at 25%, and Power Systems most of the 24% balance. Rolls also operates a small New Markets division, focused on opportunities for the transition to net zero such as developing small low-cost nuclear reactors and hydrogen powered engines. Geographically, the US accounts for most sales at 29%, followed by the UK at 14%, China 7%, Germany 6%, and many other countries the balance of 44%.   

For investors, accompanying management comments talked about a degree of uncertainty raised by the implementation of US trade tariffs. Supply chain disruption, as previously flagged by aircraft maker Airbus SE (EURONEXT:AIR), is not to be forgotten. A forecast dividend yield of 1% is less than the 2%-plus yields on offer at defence rivals BAE Systems (LSE:BA.) and Chemring Group (LSE:CHG), while global geopolitical tensions in the Middle East and Ukraine could still escalate, potentially disrupting the group’s airline customers. 

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To the upside, Rolls is confident that ongoing group actions will mitigate any trade tariff impact, with a previously outlined full-year profit estimate reiterated. A recovery for civil aerospace following the pandemic now combines with increased demand for defence provision given raised global geopolitical tensions. Newly targeted customers now include data centres for the Power Systems business and government and corporate provision of nuclear power for its New Markets division, while a strengthening of its balance sheet has improved its credit rating. 

In all, and despite ongoing risks, self-help actions and an increasingly diverse base of customers hungry for efficient power are likely to keep fans of this UK engineer remain optimistic about the long term. 

Positives: 

• Investing in climate change related product innovation
• £1 billion share buyback programme

Negatives:

• Uncertain geopolitical outlook
• Supply chain challenges

The average rating of stock market analysts:

Buy