Tufan Erginbilgiç didn’t quite catch the bottom for Rolls-Royce’s share price when he joined as chief executive at the start of 2023, but he came close. The reference price for his £7.5m-worth of “golden hello” shares – the cost of extracting him from the world of private equity – was 91p. The engine-maker’s share price is now 732p, up 16% on Thursday’s ultra-bullish full-year report, meaning the value of Erginbilgiç’s signing-on package has inflated to a princely £60m. Not bad for two-and-a-bit years’ work.
He has to wait until 2027 and 2028 to collect the shares, but, unless a pandemic bigger than Covid lies around the corner, the risk of the paper gains evaporating before they become real looks negligible. The full-year numbers were streets ahead of what even City optimists had expected.
First, “midterm” 2027 targets for operating profits will be hit two years ahead of schedule, said Rolls. Second, its new forecasts for 2028 represent another big bound forwards – from £2.7bn-£2.9bn this year to £3.6bn-£3.9bn. Third, Erginbilgiç says Rolls won’t stop there – “these mid-term targets are a milestone, not a destination,” he declared with a flourish.
A few remaining City doubters maintain that the pace of the recovery is misleading and that the game for Rolls will get harder. The sceptical argument says currency movements, the civil aviation industry’s roaring comeback from Covid and backlogs in the delivery of new aircraft have all assisted Erginbilgiç’s much-vaunted renegotiation of contracts with airlines and suppliers.
Erginbilgiç bristles at suggestions that renegotiating better terms represents a soft sort of victory – “if you classify that as an easy gain, you should be in the meeting room and you’ll change your mind.” He surely has a point because it’s hard to quibble with Rolls’ new-found ability to generate heaps of cash, the measure on which it fell short for about two decades even before Covid grounded planes and ripped through revenues from servicing engines. The company had to borrow heavily to survive the pandemic but is already debt-free and can afford a £1bn share buyback. It expects to be spitting out £4.2bn-£4.5bn of cash in 2028. Given the contracted nature of the business, the solidity around the projections ought to be good.
As for the “strong growth prospects beyond the mid-term”, it’s also hard to dispute that Rolls finds itself in multiple sweet spots. Small modular reactors should (finally) get the go-ahead. The power systems business can expect a new class of customer in the form of data centres. The defence division was nicely supported by the Aukus submarine partnership even before governments’ boost to military spending. And the potential biggie, sometime in the 2030s, would be Rolls’ re-entry into the market for engines for narrow-body airplanes – it currently supplies only the wide-body market.
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None of the new adventures would be cheap and one long-term danger is that the new streams of cash are spent inefficiently; alternatively Rolls could fail to attract the right partners. But those are tomorrow’s challenges. In the meantime, it’s enough to say the stunning revival at Rolls appears genuine. Four and a half years ago, the company was virtually bust and needed an £2bn emergency rights issue. Now it is worth £62bn and is the eighth largest company in the FTSE 100 index.
Article by:Source: Nils Pratley
