Rolls-Royce Holdings PLC (LSE:RR.) has set ambitious new targets, unveiled at its long-anticipated capital markets day (CMD) event on Tuesday, which would position it to broadly beat analysts’ medium-term expectations.
According to analysts, the market’s widespread optimism that this month’s Rolls-Royce investor day would be transformational was “well placed”.
Rolls-Royce Chief Executive Tufan Erginbilgic said yesterday that the group is at a “pivotal point” in its history, as it revealed the shock decision to axe its electrical business and potentially other ‘subdivisional’ parts of the business.
Rolls-Royce pledged to divest up to £1.5 billion of non-core assets, only if the price is right, with the horizon for any such disposals stretching to five years.
Deutsche Bank stock market analyst Christophe Menard said Rolls-Royce's electrical aviation business, which forms part of the New Markets division, “does not make any material revenues”.
He predicts that industrial business activities within Rolls-Royce's Power Systems segment could also come up for sale, adding in a research note on Wednesday that only non-core assets would be sold.
Menard noted that the target for disposals of non-core assets is not included in Rolls-Royce's medium-term guidance.
The company said at its investor day on Tuesday that it is aiming for an operating profit of £2.5 billion to £2.8 billion over the medium term, driven in no small part by a "step change" in its core Civil Aerospace business.
Rolls-Royce's medium-term targets beat Deutsche Bank's expectations, Menard said.
“We were encouraged by improved visibility compared to the 2022 CMD,” Menard said in a research note, reiterating the bank’s buy rating and target share price of 310p.
“Overall, our optimism running into the CMD appears well founded.”
Rolls-Royce also expects to boost its operating margin to between 13% and 15%, which would beat the bank’s estimates for fiscal 2023 of 9.8%.
Although there is currently no consensus for 2027, the company’s projected margin improvements across Civil, Power Systems, and Defence were generally ahead of its estimates for the coming year.
Likewise, UBS analysts said in a separate note on Tuesday that the targets are “slightly ahead” of even its market-beating consensus.
As other analysts at investment bank Liberum noted, Rolls-Royce “outperformed in the UK after setting more ambitious targets for cash flow and return on capital by 2027”, enjoying a 7% boost to its share price.
Yet there could still be a snag to Rolls-Royce's reliance on aerospace performance.
Citi analysts Charles Armitage and Sam Burgess said on Tuesday that the Trent XWB-97 engine that came under fire from Emirates Airline’s President Tim Clark, who recently claimed that the engine was defective, is not very durable even if it is not faulty.
They said the engines have a “durability issue, particularly in harsh conditions” such as the hot and sandy conditions in the Emirates.
Rolls-Royce has a “technology insertion path” to improve the time on wing, which includes UltraFan technology, but appears “unwilling to effectively guarantee the improvements” through lower pricing for its long-term contracts, the analysts said.
“We believe this greater focus on improving financial performance rather than market share is appropriate now Rolls-Royce has over 50% market share in wide bodies and is looking to reap the rewards,” the Citi analysts added.