ii view: Rolls-Royce powering all divisional engines

Trading update for 10 months to 31 October

• Large Engine Flying Hours (EFH) up 8% to 109% of pre-pandemic 2019 levels
• £900 million of a £1 billion share buyback programme executed

Guidance:

• Continues to expect full-year 2025 underlying operating profit of £3.1-to-£3.1 billion
• Continues to expect full-year 2025 free cashflow of £3.0-to-£3.1 billion

Chief executive Tufan Erginbilgic said: 

"Strong performance across the Group, driven by our actions and strategic initiatives, was in line with our expectations. 

"We are continuing to progress our transformation programme, delivering profitable growth, and further strengthening our balance sheet."

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ii round-up:

The FTSE 100 company Rolls-Royce Holdings (LSE:RR.) has a local presence in 48 countries and customers in over a hundred more. Civil Aerospace divisional sales include supplying large aircraft engines as well as those for business aviation. 

Defence related products include engines for fighter and military transport aircraft as well as those for helicopters and nuclear submarines. Power System customers include boat builders, industrial manufacturers, utility providers and data centre operators.

A former New Markets division, seeking net zero climate change opportunities, is now focused on nuclear or Small Modular Reactors (SMR) and hydrogen powered engines. 

For a round-up of this latest trading update announced on 13 November, please click here. 

ii view:

Started in 1906, Rolls-Royce today employs over 40,000 people. Civil Aerospace generated most sales during 2024 at 51%, followed by Defence at 25% and Power Systems most of the 24% balance. Geographically, the USA accounted for most sales during 2024 at 29%. Other major customers included the UK at 14%, and China and Germany at 7% and 5% respectively.

For investors, supply chain challenges persist with operational issues at major civil aircraft makers Boeing Co (NYSE:BA) and Airbus SE (EURONEXT:AIR) also potentially slowing required deliveries. Public trust in nuclear safety and potential SMRs near to major populations has yet to be fully tested. A forecast dividend yield of under 1% is below the near 2% yields on offer at defence rivals Chemring Group (LSE:CHG) and BAE Systems (LSE:BA.), while global geopolitical tensions around the Middle East and Ukraine could still escalate, potentially disrupting the group’s airline customers.

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To the upside, demand for more fuel-efficient engines continues to aid demand for the Civil Aerospace business. Ongoing geopolitical tensions now see governments, particularly across Europe, increasing defence spending. Power Systems order demand is being aided by growing numbers of data centres, while hopes for SMRs persist with the UK government already announcing Anglesey in Wales as the location for its first UK SMR.  

In all, exposure to the volatile airline industry continues to warrant some caution. That said, diversified growth and a consensus analyst estimate of fair value at £12 per share are likely to see fans of this power provider staying optimistic.    

Positives: 

• Investing in climate change related product innovation
• Ongoing share buyback programme

Negatives:

• Imposed Trump trade tariffs
• Supply chain challenges

The average rating of stock market analysts:

Buy