Rolls-Royce Holdings PLC (LSE:RR.) is likely to sell off its electric aircraft business, analysts expect, as part of the strategic review being carried out by new chief executive Tufan Erginbilgic.
Just as a report seeming to write off the chances of sustainable jet fuel was published on Tuesday, broker Shore Capital also issued a note on the FTSE 100-listed engine makers.
Ahead of Erginbilgic announcing his transformation plan later this year, Shore Cap analyst Jamie Murray said the rejig is expected to be "comprehensive" for a company that the new CEO described as a “burning platform” and had already cut many thousands of jobs under previous boss Warren Ellis.
The seven-pronged business review is focused on operational performance and improving return on capital employed (ROCE), "which we view as a critical imperative", Murray said.
Underperforming business lines will be sold off.
"We think the most likely candidate is Electrical Aerospace, where Rolls-Royce has failed to commercialise on its current partnerships," the analyst said, despite the need for electrical alternatives if alternative jet fuel is not going to deliver the huge cuts to emissions needed to achieve 'jet zero' ambitions.
Rolls has a number of irons in the sustainable air travel fire, having last year supplied the engine for what was said to be the world’s first hydrogen-powered jet, plans unveiled for a first net-zero transatlantic flight in 2023 using its Trent 1000 engines, and progress also in the development of its ‘Ultrafan’ engine that is designed to run solely on sustainable air fuel.
There are higher expectations for Rolls' Small Modular Reactors (SMR) nuclear business, Murray suggested.
"Management believes the ceiling for SMR is far higher, with costs largely funded by the UK government. SMR returns are likely to be priced in only once the UK government submits an order – this remains a priority for management and should act as a catalyst for the stock."
Shore Capital's forecasts were upgraded following the company's recent results, joining the recent throng of analyst upgrades, with further valuation kickers seen later this year.
Murray said he has updated his model to reflect a better outlook than expected for the engine maker, with underlying profit (EBIT) and free cashflow expected to be at least £0.8bn and £0.6bn respectively.
"Medium term guidance will be announced in H2, which could generate further upside if management provides a credible plan to stimulate returns," he said.
"In the meantime, market tailwinds (e.g. flying time recovery and elevated defence spending) provide a natural boost, whilst any evidence of a UK government order for SMRs should be a further positive."