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.
- Causeway Capital Management, LLC.
- The Vanguard Group, Inc.
- Harris Associates LP.
- BlackRock Fund Advisors.
Advisors and Bookrunners:
- JP Morgan.
- Royal Bank of Scotland.
- 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.
- General Electric Aviation. (GE)
- Hexel Corporation. (HXL)
- Heico Corporation. (HEI)
- Raytheon Technologies Corp (RTX)
- 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/
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