Every time I’ve checked recently, the Rolls-Royce (LSE: RR) share price seems to have ticked up a bit.
So far in November, it’s up 20% after soaring another 15p today (28 November) to reach 258p. This is the highest it has been in four years.
The reason for this latest jump is the upbeat statement the engineer released ahead of today’s Capital Markets Day event.
Mid-term financial goals
There was a lot announced today, far too much to cover in this piece. But here are some highlights:
- It has a mid-term operating profit target of £2.5bn-£2.8bn, with an operating margin of 13-15%
- Free cash flow of £2.8bn-£3.1bn
- A return on capital of 16-18%
Drilling down, Rolls is targeting much higher operating margins in each of its three core divisions:
- Civil Aerospace to improve from 2.5% in 2022 to 15-17%
- Defence to improve from 11.8% to 14-16%
- Power Systems to go from 8.4% to 12-14%
Mid-term is generally seen as five years, so 2028-ish. To put this in context, the company generated an operating profit of £837m last year, with a margin of 6.2%.
Understandably, the pledge for much higher profits has gone down well with investors.
Narrow-body partnerships
Rolls makes engines for larger, wide-body planes used for long-haul travel, but it wants to re-enter the narrow-body market.
And it reiterated its intention to form partnerships here: “In Civil Aerospace, we believe we are well positioned to re-enter the narrow-body market, by choosing a partnership approach for the next new engine programme, and our UltraFan technology is a vital step towards this.”
UltraFan is its next-generation engine, which the firm says is at least 10% more efficient than anything similar. It plans to roll it out on planes in the 2030s.
Partnerships are a smart move, as they de-risk and reduce the capital needed for such projects. Yet its mid-term targets “are not reliant upon securing such new partnerships“.
More disposals
Management also announced an additional £1.bn-£1.5bn group-wide divestment programme. The main casualty here will be its electric flight division.
In hindsight, perhaps this one was inevitable, as flying taxis and the like aren’t expected to contribute to the bottom line for many years.
It’s known that CEO Tufan Erginbilgiç isn’t convinced about small modular reactors (SMRs), another futuristic technology without any immediate payoff. However, they seem safe for now, maybe because they’ve received government backing.
More share price growth?
All in all, I was very impressed with what I’ve seen today as a shareholder. These measures are designed to make Rolls-Royce a more resilient business, one which isn’t brought to its knees again if there’s another external shock like a pandemic.
Of course, the turnaround isn’t complete yet. And the recent outbreak of a respiratory illness in China reminds us that another pandemic could always be lurking around the corner. Further lockdowns would severely dent the company’s progress and represent an ongoing risk.
As for the stock, it’s trading on a price-to-earnings-to-growth (PEG) ratio of 0.63. So it doesn’t appear overpriced.
Given this and the much-improved profitability outlook at the firm, it wouldn’t surprise me to see analysts upping their price targets (again). I think £3 may be on the cards after today. So I’m going to keep holding my shares.
