Rolls-Royce Holdings PLC (LSE:RR.) was scorching trading screens on Thursday after reporting profits and cash flow which smashed City expectations, fuelling hopes of a brighter future for one of Britain’s best-known names.
The FTSE 100 listed firm, described as a “burning platform” by new chief executive Tufan Erginbilgic just days into his tenure, was a warm order with shares rising over 20%, as operating profits of £527mlm came in 42% ahead of consensus.
Erginbilgic, a former BP executive, has certainly caught the attention of investors and may not be too upset that his private remarks addressed to Rolls-Royce staff miraculously appeared in the mainstream press. He clearly feels the need for change which will also require a shift in attitude.
Launching a seven-pronged transformation programme aimed at improving efficiency and commercial outcomes, Erginbilgic said this would “require a winning culture,” and that “we must now move at pace.”
“While our performance improved in 2022, we are capable of much more,” he claimed.
The long-term commentary was noted as being “very bullish" by UBS, though analysts expected the shares to slide due to 4-6% earnings growth guidance for 2023 being weaker than the City consensus of 7%.
Targeting seven areas of improvement at the outset, said Russ Mould, investment director at AJ Bell said, “is some going and its clearly got investors excited.”
He added: “For years Rolls-Royce has disappointed on cash flow and it’s no surprise to see this as an area of priority alongside the standard recovery mantra of improving efficiency, reducing debt and improved ‘performance management."
A strategic review also suggests the new boss is looking at further disposals to help reduce borrowings following the sale of ITP Aero in 2022.
The firm has £4.1bn of drawn debt with batches maturing in the next five years. In reducing debt further the aim is to return to an investment grade credit rating and to resume shareholder payments. No dividend was paid in 2022.
But for all the talk of culture and transformation it may just be that Erginbilgic has timed his arrival well. Dogged by the pandemic and the collapse in international travel, Rolls-Royce is now benefiting as planes and passengers take to the skies once more.
Further increases in flying hours are expected in 2023 approaching up to 90% of pre-pandemic levels. This should support demand for the firm’s engines. Only last week Air India announced the biggest ever Trent XWB-97 order and it is unlikely to be the last.
The engineer will also benefit from the need for spares and repairs on installed engines pick ups as flying hours increase.
As Mould pointed out this is one of the company’s “most lucrative areas of operation,” and is "directly linked to how long planes spend in the air.”
Analysts at Shore Capital also noted that defence order intake was £5.4bn last year, over double the previous year, “providing early signs that defence markets are enjoying elevated demand for products and services as geopolitical uncertainty continues”.
It’s early days for the new Rolls-Royce chief, talk is cheap, and knocking the company into a more efficient shape will take time. But Erginbilgic appears focused, energetic and determined to lift the ailing company’s fortunes and today’s share price reaction suggest he is off to a good start.
As Napolean Bonaparte said, “I would rather have a general who was lucky than one who was good.” It may just be that Erginbilgic will prove to be both.