Rolls-Royce Holdings PLC (LSE:RR.) has had its credit rating lifted by agency S&P Global after reporting a jump in margins over the first half of the year.
S&P lifted Rolls-Royce’s rating from BBB/A-3 to BBB/A-2, noting better margins had led to improving expectations for profitability over the coming years.
“We continue to see significant deleveraging over the next two years and a strengthening balance sheet,” S&P said in a statement.
“Rolls-Royce's credit metrics have improved materially over the last 24 months, and we expect that trend to continue.”
Rolls-Royce reported earlier this month that its underlying operating margin had sat at 14.0% over the first half of the year, from 9.6% previously.
Though this was driven by improvement in its civil aerospace division, with growth expected to slow over the coming years, S&P said other business lines would likely support margins.
Underlying profit increased by 74% to £1.1 billion in the meantime, prompting guidance for the full year to be upped.
S&P added that Rolls-Royce’s plan to bring back shareholder rewards was unlikely to negatively affect deleveraging efforts too much, given its “balance sheet has been strengthened enough”.
S&P estimated free cash flow of £2.1 billion to £2.3 billion over the coming two years, in line with Rolls-Royce’s guidance, alongside revenue growth of 5% to 7% in 2024.
Net debt against EBITDA is expected to dip to between 0.0x and 0.5x, from 0.9x in 2023, over the coming two years, S&P added.
“The positive outlook reflects that we could raise the rating on Rolls-Royce over the next 18 to 24 months.”