Rolls-Royce is synonymous with classic British luxury cars. But the company doesn’t actually make cars anymore—that unit has been a subsidiary of Germany’s BMW since 2003.
Shares of Rolls-Royce Holdings (ticker: RR.UK) have jumped this year under new Chief Executive Officer Tufan Erginbilgic on hopes he will turn things around after years of underperformance.
Rolls-Royce’s underlying profit rose more than 50% in 2022. The company gets the bulk of its income from servicing aircraft engines, and it says that engine flight hours, a key metric, will continue to increase this year. It expects flight hours to reach as much as 90% of the prepandemic levels of 2019 this year. They were at just 65% of that in 2022.
“Historically, Rolls-Royce has traded at a low valuation to peers,” say analysts led by George Zhao at Bernstein. “The strong 2022 finish and 2023 [guidance] could lead to optimism for investors that the company is on the path to improved performance and improved confidence.”
London-based Rolls-Royce employs 41,875 staff and has a market value of 12.3 billion pounds sterling ($15.1 billion). It develops, manufactures, and services power systems, or engines, for vehicles on land, air, and sea.
Rolls-Royce fetches 27.4 times this year’s expected earnings and is valued at a 60% premium to peers. Shares are up 53% this year, to £1.43. The average target price among 12 analysts surveyed by FactSet is £1.52.
Christophe Menard, an analyst at Deutsche Bank, says shares could rise to £1.60. That’s on the back of a prediction that operating profit will climb by around 19%—and that’s without an expected boost from Erginbilgic’s latest turnaround drive.
Erginbilgic, a dual Turkish-British national, took the helm in January. Rolls-Royce had a difficult pandemic as travel restrictions kept most airplanes grounded. Predecessor Warren East launched a restructuring program in the wake of the Covid-19 downturn, eliminating 9,000 jobs to save on costs.
When Erginbilgic started the job, he said the company was in danger of becoming a “burning platform” and that it was a last chance to win investors back. He pledged to focus on efficiency and optimization, and demanded that the business worry more about profit and loss and less about increasing market share.
Erginbilgic spent more than 20 years at oil and gas giant BP, leading its refining and market division and overseeing the company’s investments in electric-vehicle charging.
He left BP in 2020 after being passed over for the top job. He told journalists he was attracted to Rolls-Royce because of its global brand, and because it was an opportunity to help transition the company to a low-carbon future.
The more immediate task for the new CEO is returning Rolls-Royce shares to their former glory. They traded as high as £3.60 in 2014, and were above £3 in May 2019, not long before the Covid-19 pandemic struck.
Bernstein’s Zhao still sees a risk that shares could falter if the company can’t follow through on its new plans. His price target is £1.08, 28% lower than where shares are currently trading.
“We will need clarity on new targets and strategies,” Zhao says, adding that the company still needs to execute and deliver on the targets.
“That will take time, with downside risks of false starts,” he says.
Source : Barrons