(News Bulletin 247) – The aeronautical engine manufacturer has had an increase of 39% since the start of the year, and especially about 760% over three years. Plusted by the pandemic, the company has strongly rebounded thanks to the resumption of air traffic but also to the strategy of its general manager, Turfan Erginbil, based on refocusing and successful tariff policy.

If Luca de Meo, the director general of Renault, is often rented for the recovery he operated at the head of the group at the diamond, the qualifiers are missing to describe the rebirth of another industrialist, Rolls-Royce. The British aeronautical group (the car manufacturer is held by BMW) present on the engines of large carriers (roughly half of its income) and the defense (a little over a quarter) has been 39% since the start of the year.

The title was carried out by results above expectations, medium -term ambitions revised upwards and share buybacks.

The exhibition relatively high in the defense of Rolls -Royce – it is greater than that of Airbus and Safran – has also carried the action, this sector being clearly the big winner on the stock market since the beginning of the year. This because of the will of European leaders to clearly enhance their military spending, Germany in the first place.

Bank of America notes on this point that the group’s growth reservoir is “very strong”, citing in particular the F130 engine for the B-52 Stratofortress military aircraft of Boeing or the GCAP (“Global Combat Air Program”) The joint initiative between the United Kingdom, Italy and Japan, Rival program of the Airbus Scaf, Dassault Aviation, Safran and MTU Aero.

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Dark action during the pandemic

Rolls-Royce’s market performance impresses mainly on the Middle Term. Over three years, the title takes almost 760%, an increase that atomizes those of the best students in CAC 40 (Hermès is +106%, saffron at +141.8%) and which fines the “seven magnificent” of Wall Street, Nvidia progressing “only” of 340%over the same period.

Without too much surprise, this increase is actually a rebound, the title Rolls-Royce having descended at abysmal levels.

According to Investing.com data, the action fell by more than 1,000 pence (10 pounds sterling) in October 2018 at 39 pence in October 2020. The title then evolved between 70 and 150 pence approximately until the beginning of 2023. Action, after, started to take off to currently reach around 800 pence. In other words, the title has evolved into “U” since 2018. With a handful of billions of pounds in the hollow of the wave, its market capitalization increased to nearly 70 billion pounds.

In 2024, its income exceeded their 2019 level, and the company released more than 2.29 billion pounds of cash flow. “Rolls-Royce is the true story of a phoenix that is reborn from its ashes,” said AJ Bell last December.

As said previously, Rolls-Royce is very exposed to aircraft engines operating on long-haul flights, and more particularly in post-sales services, that is to say, for example, repair, maintenance, sales of spare parts. However, these professions are very dependent on air traffic, since the more intense the flight cycles of planes, the more frequent workshop visits, and the higher the demand for these services.

However, the pandemic nailed the devices to the floors, a fortiori the large carriers, segment on which the post-Cavid recovery was (logically) occurred later than for the single-offs.

In 2020, the British company’s revenues fell by almost 30%, and the group burned 4.2 billion pounds in cash. Rolls-Royce will consume more than 1.5 billion pounds in 2021 before returning to green in 2022.

The company was forced, in October 2020, to announce a recapitalization plan of 5 billion pounds, including a capital increase of 2 billion pounds, synonymous with heavy dilution for its shareholders. Rolls-Royce had also had to cut in its workforce, with 9,000 deletions of announced positions.

A new driver that changes the situation

Before the health crisis, the company had been penalized by other opposite winds, such as Brexit, the stopping of the production of the A380 of which it was one of the suppliers of the engines, and especially repeated technical concerns on the Trent100, engine which equips the 787 “Dreamliner” of Boeing. The group has since invested heavily to solve these problems in Trent1000.

Rolls-Royce therefore recovered from a square and his stock market for a little or less coincided with the arrival of a pilot: Tufan Eginbilgic. This training engineer worked within the aviation fuel division at BP as well as the GIP infrastructure fund. The Britannico-Turkish landed on January 1, 2023 at Rolls-Royce, taking the lead of a large company at the age of 63.

The manager then implemented a strategy intended to revive the company’s profitability and cash generation of the company.

He decides to refocus Rolls-Royce, by announcing a program of assets of 1 billion to 1.5 billion pounds but also by closing a start-up, and by deviating from hydrogen technologies to focus on lasting fuels.

The manager activates several levers to improve cash collection and the profitability of long -term contracts (LTSA) for services, with in particular an increase in income from contracts in the flight hours on civil engines. Last year, these contracts in flight hours also exceeded their 2019 level (104%).

This improvement has notably gone through the negotiation of better terms in these contracts (and therefore more favorable prices) with customers, a certain rigor under the conditions and execution of these contracts, but also reductions on maintenance costs, notes the independent alphavalue design office.

These initiatives were therefore successful. “Tufan Erginbilgic, at the head of Rolls Royce since January 2023, has implemented a successful restructuring strategy which has made it possible to improve margins and operational efficiency,” summed up AlphaValue, in a note published at the start of the year.

“By lengthening the ‘Time on Wing’ (an engine reliability indicator, editor’s note), by renegotiating contracts and dissociating key components in order to obtain greater value, Rolls-Royce transforms its post-sales activity into a more profitable activity” continues the design office.

“Under the direction of the director general Tufan Erginbil, Rolls-Royce has repositioned himself as a leader of aerospace and defense, financially solid, with a high margin and rich in liquidity (…) The company has properly executed commercial improvements, cost controls and the strengthening of its assessment” abounds Morningstar.

Still potential?

A success that J Bell tempers a little bit. In parallel with the initiatives of its managing director, Rolls-Royce also benefited from the period of the powerful resumption of air traffic. To give an idea, according to IATA, international traffic, that of long-haul flights, jumped 41.6% in 2023, reaching 89% of its 2019 level, after 62% in 2021. In 2024, this traffic will even exceed 0.5% its 2019 level to reach a new record.

In addition, “after having disappointed for years on the cash generation, Warren East (patron of the group from 2015 to 2022, note) laid the foundations for more rigorous management of Rolls-Royce, but it was his successor, Tufan Erginbilgiç, who covered himself with glory for this great recovery”, adds Aj Bell.

After this rally, can Rolls-Royce still progress on the stock market? “If operational progress is undeniable, valuation becomes a question mark” and leaves “less space for error,” warns AlphaValue. The design office believes that investors who have not yet embarked on the action have no reason to get on board. “Any unexpected disappointment could lead to a quick correction,” warns AlphaValue.

Bank of America is, for its part, to buy. “Rolls Royce benefits from a strong resumption of international trips and the renegotiation of prices, which leads to strong growth in free cash flow”, writes the bank. Bank of America also judges “attractive” valuation, among the cheapest in the sector.

UBS also recommends buying the title, because it considers that the market will have more confidence in the management flight plan as the company brings its profitability closer to that of its peers. The Swiss bank estimates that the operating margin of the civil services of the company could reach around 20% in 2028 (against 16.6% in 2024), to get closer to that of Safran (20.6% in its propulsion division in 2024).

Jefferies and Deutsche Bank are also purchased on the title and, more broadly, 12 of the 17 design offices according to the action recommend acquiring it, according to Investing.com.