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Rolls-Royce due diligence.

Hatchworks has conducted due diligence on Rolls-Royce, the second largest British manufacturer of aircraft engines in the world, established in 1904. Rolls-Royce specializes in the design, manufacture and marketing of engines for the aeronautics, marine, and energy sectors.

Net sales breakdown:

  • Civil Aerospace: 51%. Rolls-Royce powers more than 35 types of commercial aircraft and has over 13,000 engines in service around the world. They maintain services for Boeing, Airbus, Dreamliner.
  • Power Systems & Nuclear: 22%. Powerful and reliable systems, based on both gas and diesel engines and electrified hybrid systems.
  • Defence: 20%. Rolls-Royce is a strong player in the defence field with more than 16,000 military engines with 160 customers in 103 countries.
  • ITP Aero: 7%. Industria de Turbo Propulsores, a Spanish company that manufactures gas turbine and aero engines. It’s a subsidiary of Rolls-Royce (RR.).

Headquartered in London, United Kingdom, Rolls-Royce is listed on the London Stock Exchange, under the symbol ‘’RR.’’

Financials — Rolls-Royce
(Source: Marketscreener.com, investing.com)

Rolls-Royce current market cap is £4.4B and stock price is around £215.

With a predicted net-income of £341M for 2021E, this points to a P/E ratio of 18x. The revenue/sales forecast is £12.6B for 2021E, indicating an EV/Sales ratio of 0.68x.

In terms of profitability, a small operating margin loss of -0.86% is predicted for 2020E.

Rolls-Royce is a yielding equity with a low yield of 0.34% for 2020E. This is moderately lower than its biggest competitor such as General Electric (GE), for example, who has a slightly higher yield of 0.57% for 2020E.

The spread of Covid-19 and response by the aviation industry has resulted in an unprecedented decline in global air traffic. As Covid-19 spread around the world, airlines reacted by halting flying and governments put travel restrictions in place. As a consequence, commercial air traffic shrunk by approximately 41%.

Recent news shows that Rolls-Royce (RR.) has reached an agreement with Bell Textron Inc. to provide the propulsion system for the V-280 Valor aircraft as it moves forward to compete for the U.S. Army’s Future Long-Range Assault Aircraft (FLRAA) Program. This further strengthens the company as a leader in the aerospace manufacturing industry.

It’s worth noting that the Rolls Royce’s (RR.) business model is a highly-diversified one. The civil aviation segment has faced several challenges, but the overall business has been relatively stable because of the strong performance of other units. Also, Rolls-Royce (RR.) has long-term contracts in the civil aviation sector to maintain, repair and overhaul engines which may stabilize their cash flow.

According to our analysis, Rolls-Royce operates in a well diversified sector, with long-term contracts and a relatively attractive EV/Sales, P/E ratio compared to its peers and a modest debt position. Therefore, Hatchworks remains an investor.

The Hatchscore is 5 out of 10. Full details can be found on Hatchnet: www.hatch-net.com/companies

What is Rolls-Royce?

Rolls-Royce is the second largest British manufacturer of aircraft engines in the world. It specializes in the design, manufacture and marketing of engines for the aeronautics, marine, and energy sectors.

Big Investors:

  • Causeway Capital Management, LLC.
  • The Vanguard Group, Inc.
  • Harris Associates LP.
  • BlackRock Fund Advisors.

Advisors and Bookrunners:

  • JP Morgan.
  • Royal Bank of Scotland.
  • Citigroup.
  • BNP Paribas.

What are the risks?

  • Rolls-Royce is exposed to a number of market risks like foreign currency, oil price, interest rates. A negative change could affect their operational results.
  • Competitors with disruptive technologies or new entrants with alternative business models could hurt their operating results and future growth opportunities.
  • Political risk can hurt Rolls-Royce operations, like changes in tax and regulations or significant tensions between major trading parties.
  • A prolonged/sustained downturn in global air-travel could result in less orders for boeings/airbus by major airlines and thus continue to weigh down on Rolls Royce’s order book.

Competitors:

  • General Electric Aviation. (GE)
  • Hexel Corporation. (HXL)
  • Heico Corporation. (HEI)
  • Raytheon Technologies Corp (RTX)

Management team:

  • Sir Ian Davis: Chairman.
  • Warren East CBE: Chief Executive.
  • Stephen Daintith: CFO.

The Hatchworks Team

The forecast figures are based on the data of Marketscreener.com, and not from hatchworks: https://www.marketscreener.com/ROLLS-ROYCE-HOLDINGS-PLC-4004084/financials/

Legal Disclaimer — This report summary has been generated as a result of Hatchworks’ proprietary company vetting and filtering system. The level of due diligence conducted on investible assets conducted ranges from mediocre to significant, the latter being the case where Hatchworks has explicitly taken strategic positions in. By no means is the information in this file to be relied on as investment advice; this includes Hatchworks’ algorithmic composite score known as ‘Hatchscore’. Hatchworks has not received any compensation for this research. For more information you can reach us at info@hatchworksvc.com. This report is not for distribution in the United States of America. It is closed to U.S citizens. If you are a U.S. citizen, you should delete this report or return to sender.

Written by

Heading up the group’s R&D activities for Hatchworks.

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