- Margins up in all divisions
- Mid-term targets upgraded
- Rolls-Royce returns to dividend list
Investors who thought Rolls-Royce’s (RR.) recovery story would lose momentum were proven wrong on 27 February as shares in the aero-engine maker surged 15% to 725.4p, a new record high, on superb full-year results and upgraded targets.
Derby-headquartered Rolls-Royce, which will go down as one of the greatest turnaround stories in recent memory, also reported a significant strengthening of its balance sheet, reinstated the dividend and launched a £1 billion share buyback.
WE HAVE LIFT-OFF
Covid very nearly ended the company, and shortly after being appointed as chief executive in January 2023, Tufan Erginbilgic told the firm’s 42,000 employees they were standing atop ‘a burning platform’.
But he also set out his aim to reverse the slide in profit margins and lay the groundwork for a new century of growth at the 120-year-old manufacturer. Erginbilgic has done that and then some.
Despite ongoing supply chain challenges, results for the year to December 2024 revealed a 15.8% jump in revenue to £17.85 billion and a 57% surge in underlying operating profit to £2.5 billion, driven by strategic initiatives including commercial optimisation and the delivery of cost efficiencies across the group.
Margins expanded in all three divisions - Civil Aerospace, Defence and Power Systems - and Rolls-Royce swung from a £2 billion net debt position at the end of 2023 to having £475 million of net cash in the coffers at the end of 2024. Drawing confidence from a strengthening balance sheet, Rolls-Royce returned to the dividend list by declaring a 6p per share payout.
UPGRADED GUIDANCE
Full-year 2025 guidance, pointing to underlying operating profit and free cash flow in the £2.7 billion to £2.9 billion range, sees the renowned engine-maker delivering its targets for 2027 two years earlier than planned.
As if that weren’t enough, the FTSE 100 firm upgraded its mid-term underlying operating profit target to the £3.6 billion to £3.9 billion range and raised its free cash flow and return on capital targets to £4.2 billion to £4.5 billion and 18% to 21% respectively.
PACE AND INTENSITY
Erginbilgic said the strong 2024 results ‘build on our progress last year, as we transform Rolls-Royce into a high-performing, competitive, resilient, and growing business. All core divisions delivered significantly improved performance, despite a supply chain environment that remains challenging.’
He added: ‘We are moving with pace and intensity. Based on our 2025 guidance, we now expect to deliver underlying operating profit and free cash flow within the target ranges set at our Capital Markets Day, two years earlier than planned.’
Erginbilgic also stressed Rolls-Royce’s mid-term targets are ‘a milestone, not a destination, and we see strong growth prospects beyond the mid-term.’
SHIFTING THE NARRATIVE
AJ Bell investment director Russ Mould commented: ‘It’s no longer about stabilising the business; the narrative has shifted to growth and Rolls-Royce is making solid progress. A £1 billion share buyback is akin to Rolls-Royce sticking its head out the window of moving car on a warm summer’s day, enjoying the ride and knowing everything is going well.
‘The company is ahead with its targets for operating profit and free cash flow, which is impressive. Orders are piling up for areas like small modular reactors and submarines. It continues to invest in the business to grow capacity, capture more business in the future and most importantly, make its products more useful for customers. This includes a new blade which should last longer and upgrading an engine to improve fuel efficiency.’
Mould added: ‘Rolls-Royce is delivering every bit of good news imaginable, and it’s no wonder the share price has hit a new record high.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Martin Gamble) own shares in AJ Bell.
