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Rolls-Royce falls 6% as update lacks oomph and news on small nuclear business

Last updated: 16:31 11 May 2023 BST, First published: 15:02 11 May 2023 BST

Rolls-Royce Holdings PLC -
One analyst said it was "perhaps is a little concerning" that no information was provided on the SMR business

Rolls-Royce Holdings PLC's (LSE:RR.) shares fell 6% to a month's low after its trading update contained nothing new, analysts said, with some concern about the lack of updates about its small nuclear reactor business.

No financial numbers were released and the statement included no unexpected commentary, said UBS, with end-market demand as measured by flying hours in line with expectations and guidance.

"Supply chain challenges remain a key operational challenge but have neither improved nor worsened since year end, and the transformation programme continues at pace" was their summary of new boss Tufan Erginbilgic.

UBS analysts expected no reaction in the shares as "we do not believe investors had meaningful expectations either way into this release", though the shares had risen 58% since the start of the year, where they were still more than 30% below their pre-pandemic levels. 

Analysts at Shore Capital felt the update was "positive" and fitting with their investment case that Rolls represents "a compelling turnaround story".

ShoreCap said the key takeaways were Civil Aerospace flying hours continuing to recover, reaching 83% of 2019 levels in the first four months of the year, growth of Power Systems revenue being driven by strong order intake last year and this trend "likely to continue, albeit perhaps not at the same extent", though margins are "likely to improve as the group is successfully increasing prices on new orders".

"No information was provided on New Markets which perhaps is a little concerning," said the ShoreCap team, referring to the nuclear modular business.

"It is not positive news that the Small Modular Reactor contract will be put up to a public tender which will be announced at the end of the year. We still think Rolls-Royce is in prime position to win the contract, but it is not a certainty."

With the shares trading for 17.4 times 2025 forecast earnings and an enterprise value 20.1 times underlying profits (EV/EBIT), ShoreCap said its analysis of growth, return on capital and risk suggests it can trade on an EV/EBIT multiple of 23.3x, driving a 12-month fair value estimate of 180p, suggesting a potential further 15% upside at today’s price.

"We think further upgrades are possible over the next year, with the group on course to delivering a compelling turnaround story," the broker said, maintaining its 'buy' recommendation.

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