By Sarah Young
LONDON (Reuters) – Britain’s Rolls-Royce lifted its mid-term targets to reflect its confidence in future profit growth after a plan to improve engines and cut costs helped its results beat expectations, pushing its shares up 15% on Thursday.
The upgrade showed the progress made by Rolls-Royce over the last two years after former BP executive Tufan Erginbilgic took over as CEO, describing the company as a “burning platform” in need of a fundamental turnaround.
“We made great progress and we see a lot more potential,” Erginbilgic told reporters on a call.
Shares in Rolls-Royce surged to 750 pence, an all-time high.
In its results statement, the group also announced a dividend of 6 pence per share, having flagged in August that it would reinstate a payout after a five-year pandemic break, and launched a 1 billion pound ($1.27 billion) share buyback.
JPMorgan called the results “outstanding” adding “the future looks very bright”, while Richard Hunter at Interactive Investor said the unexpected share buyback was “lighting a fire under the shares”.
Another positive on the horizon for Rolls-Royce was the announcement from British Prime Minister Keir Starmer on Tuesday that he would raise annual defence spending to 2.5% of GDP by 2027 and target 3% after 2029, a move from which it is well-placed to benefit.
Erginbilgic said Starmer’s pledge would help develop the supply chain and labour skills.
Rolls-Royce’s defence business accounts for over a quarter of its annual revenue, producing engines for the Typhoon jet, making the nuclear reactors that power Britain’s submarines and working on GCAP, a project to build a new fighter jet.
MARGIN BOOST
Rolls, Airbus’s exclusive engine partner on its widebody planes and a supplier to Boeing’s 787, has historically trailed the margins made by GE Aerospace, its main competitor in that market, and an area of focus for Erginbilgic as he has sought to “transform the company holistically”.
Investing 1 billion pounds in engine improvements was a “properly” resourced project, he said, by way of example, and as such had delivered much better results than expected, meaning engines could fly for longer without maintenance.
More generally, profit growth was coming from cost-savings, improved contract terms, the growth of its submarine business and on strong demand for the power generation systems it provides to data centres.
That puts the company on track to meet its previous mid-term targets this year, two years earlier than planned, and it was now guiding to underlying operating profit of 3.6 billion pounds to 3.9 billion pounds in the mid-term, which the CEO said was based on a 2028 timeframe.
Profit for this year is expected to be between 2.7 billion pounds and 2.9 billion pounds, Rolls said, and compared to the 2.46 billion pounds it posted last year, comfortably ahead of a consensus forecast, and up 55% on last year.
Over the last year, London’s blue-chip index has risen 13%, while Rolls-Royce has doubled in value. Since Erginbilgic joined in January 2023, its shares have risen more than five-fold.
($1 = 0.7900 pounds)
(Reporting by Sarah Young, Editing by Paul Sandle, Barbara Lewis and David Evans)
