Rolls-Royce: A closer look at ITP Aero

Motley Fool contributor Jay Yao takes a closer look at a unit of Rolls-Royce that the company is reportedly planning to sell.

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Earlier in the year, Rolls-Royce (LSE: RR) disclosed plans to sell at least £2bn in assets to strengthen its balance sheet. Among the assets the company is reportedly planning to sell, ITP Aero is one of the largest. If management does a good job selling the asset, Rolls-Royce could potentially retain more value and that could help the stock. 

Given the importance of ITP Aero to Rolls-Royce’s asset divestment plans, here’s a closer look at the division. 

ITP Aero

ITP Aero is a division of Rolls-Royce based in Spain. The division manufactures jet parts for planes such as the Eurofighter Typhoon and various military transport aircraft. According to the company, ITP Aero is the world’s ninth-largest aeronautical engine and components maker. 

In terms of its finances, ITP Aero makes up a small part of RR’s total sales. In 2019, the division reported sales of £936m, versus Rolls-Royce’s total underlying revenue of £15.45bn.

Although ITP Aero accounted for only 6% of total sales last year, the division grew quite rapidly before the pandemic. In 2019, ITP Aero reported underlying sales growth of 21% year-on-year. The division was also quite profitable, with ITP Aero reporting operating profit of £111m for 2019.

Given its past growth and value, ITP Aero could be worth a substantial amount to RR, which itself only has a market value of £4.37bn at the time of this writing. In terms of how much ITP Aero is worth, it’s not clear. 

In 2019, Rolls-Royce tried to sell ITP Aero to Indra Sistemas SA for €1.5bn (£1.36bn) but the company failed to make a deal. 

Now that management is reportedly planning to sell the unit again, there are some interested parties. Earlier this year, The Daily Telegraph reported that Rolls-Royce was in talks with various American private equity firms including KKR and Blackstone Group about a potential sale of the unit. 

According to Pitchbook in July 2020, ITP Aero could be worth £1bn. Depending on how well management does in terms of negotiating, the final sale price (if it should occur) could be higher or lower. 

Foolish recap

Rolls-Royce is reportedly planning to sell a key asset, ITP Aero, to strengthen its balance sheet. RR has to strengthen its balance sheet because the jet engine maker estimates it will have an outflow of £4bn this year due to the pandemic and other factors. 

It could also take a while for RR’s business to normalise — the company estimates that in a ‘reasonable worst-case scenario’ long-haul flights might need until 2022 to recover to around 80% of pre-Covid-19 levels.

If Rolls-Royce does sell ITP Aero for a decent price, it will increase its liquidity and improve its chances of surviving the pandemic. Management has already done a lot in terms of increasing liquidity, including raising £2bn in debt with coupons between 4.625% and 5.75%.

Given Rolls-Royce’s pretty small market cap, I believe any sale of ITP Aero at a price that is above market expectations would be well received. If it were to sell ITP Aero, management would also have more time to focus on restructuring the company and managing costs, which is another plus.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Jay Yao has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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