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Rolls-Royce capital markets day: What to watch for

Last updated: 15:52 27 Nov 2023 First Published: 14:34 27 Nov 2023

Written by: Josh Lamb

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Rolls-Royce Holdings PLC

LSE:RR.

Rolls-Royce Holdings PLC -

Rolls-Royce Holdings PLC (LSE:RR.) has categorically impressed since chief executive Tufan Erginbilgic took the helm at the start of this year.

Year-to-date share price gains of almost 150% reflect that, with Erginbilgic’s widely-hailed transformation plan having clearly reassured investors that Rolls-Royce is on course to return to its former glory.

The plan is now undeniably in full swing and with the FTSE 100-listed manufacturing giant’s return to profitability earlier this year, it could be fair to ask what more is left to say.

Investors will be hoping for more given the hype around the company’s capital markets day on Tuesday, 28 November. After all, the company's share price is still well off its mid-2010s peak above 400p. This morning its shares were trading at 241p.

Flying times

According to Deutsche Bank analysts, the focus of Tuesday’s event will be on the firm's civil aerospace division, more specifically on any updates on engine flying hours, shop visit costs, and improvements to contract terms.

The outlook for each has improved since Erginbilgic took charge. Engine flying hours, key to Rolls-Royce’s earnings, have rebounded so far this year as airlines enjoy a post-pandemic resurgence in travel demand.

That said, the long-haul sector has lagged behind short-haul as China’s recovery falters, posing an issue to Rolls-Royce given its sole exposure to the former.

Investors will hope for positive news on the collective flight times of Rolls-Royce’s engines, which power various larger, wide-bodied Boeing and Airbus jets.

Analysts have tipped that such good news could be in store ahead of the investor event, with UBS earlier this month suggesting Rolls-Royce-powered flight times were sitting around 89% of pre-pandemic figures over the latter half of the year.

If indeed the case, this would be around 2% to 3% ahead of prior expectations, marking a boost to cash flow given the nature of contracts that see Rolls paid based on how much its engines are used.

Contracts

How these contracts are hashed out will also be on investors’ minds, not least due to a recent spat with major customer Emirates over the quality of Rolls-Royce’s engines.

Though boss of the United Arab Emirates’ flag carrier, Tim Clark, had labelled the Trent XWB-97 engine for the Airbus A350-1000 as “defective” earlier in November - placing a hefty potential order for Rolls-Royce in question - onlookers from Citigroup dubbed the comments as likely “commercial negotiation”.

“Why add fleet complexity of another aircraft rather than ordering more 777X?” Citi asked, given Emirates’ purchase of General Electric (NYSE:GE)-powered Boeing jets just days earlier.

Clark’s comments also came as Rolls-Royce has looked to secure better contract terms on its part since Erginbilgic’s appointment.

Rolls-Royce has guided towards a £250 million boost to full-year profit from more favourable contract terms alone, hinting at a harder line negotiating deals with customers.

Such terms have likely revolved around inflation-linked clauses for instance, UBS brokers have said, as well as other pricing and protective measures, given the recent memory of cost increases, but also groundings during the pandemic which saw Rolls-Royce’s flight-time linked earnings fall, alongside those from servicing agreements.

Cost reductions

The question of costs will likely be raised on Tuesday’s capital markets day, as Deutsche noted.

Rolls-Royce’s announcement of thousands of job cuts last month was well received by the market, which took the view that cuts were being made to improve efficiency rather than as a reactionary measure.

Any further update on cost-reducing measures that will drive efficiency in line with such a strategic shift will be keenly awaited, Deutsche said.

This leaves the financial element of the investor day, which Deutsche forecasts will cover medium-term targets.

Targets

A £1.6 billion-plus increase in pre-tax earnings by 2028 should be viable, according to the bank, with as much as £800 million of this coming from Rolls’ civil aerospace wing.

This alone could build on the £1.2 billion to £1.4 billion of pre-tax earnings being targeted by Rolls-Royce this year, which it expects to be complemented by free cash flow of between £0.9 billion and £1 billion