Rolls-Royce Upgrades Forecasts Amid Strong Performance
Rolls-Royce has once again raised its financial forecasts, with half-year results showing cashflow expected to be £200m better than previously predicted at £3.8bn-£4bn, and operating profits up £700m to £4.7bn-£4.9bn. The upgrades underscore the continued success of CEO Tufan Erginbilgiç's turnaround strategy, which has seen the share price increase tenfold since he took over.
Path to Becoming LSE's Most Valuable Company
Erginbilgiç's ambition for Rolls-Royce to become the most valuable company on the London Stock Exchange is gaining traction. With a current valuation of £120bn, the company is now neck and neck with Rio Tinto for fourth place in the FTSE 100. However, it still trails behind Shell (£185bn), AstraZeneca (£198bn), and HSBC (£274bn). The CEO's long-term bullishness appears less fantastical with each set of results, as the company's diverse portfolio drives growth.
Defence and Nuclear Propulsion
Defence remains a strong pillar for Rolls-Royce. The company produces nuclear propulsion systems for the UK's submarines, highlighted by the prime minister's recent visit to Barrow-in-Furness. The UK's defence investment plan, despite budget debates, is unambiguously positive for Rolls, with additional opportunities in propulsion systems for uncrewed aircraft.
Power Systems and AI Datacentres
The power systems division is gaining significant attention. Once seen as a maker of old-tech diesel systems for marine vessels and military tanks, it now supplies AI datacentres in the US with backup diesel and gas-fired turbines for primary power, as these facilities struggle to connect to an under-invested electricity grid. Rolls's order book for power generation was up 55% in the half-year.
Small Modular Reactors and AI Spillover
Rolls-Royce's small modular reactors (SMRs), originally intended for low-carbon national grid power, are now attracting interest from hyper-scale datacentre projects in the US. This gives Rolls a foot in several AI power camps: diesel for backup, gas for primary power, and SMRs expected in the 2030s.
Potential Re-entry into Narrowbody Engine Market
Rolls-Royce is considering re-entering the market for engines for narrowbody aircraft, a move that would open up a market many times larger than the widebody segment. Airbus and Boeing have yet to commit to new single-aisle models, and competition from incumbents is fierce. However, the potential market is enormous, and Rolls's requests for financial support from the UK Treasury are likely to be granted, given the strategic importance of aerospace manufacturing.
Conclusion
Erginbilgiç's vision for Rolls-Royce, positioned at the centre of defence, AI, and energy transition via nuclear, is increasingly credible. While setbacks are possible, the company's diverse opportunities make it unique among major UK firms. In retrospect, the Treasury missed an opportunity in 2020 to convert loan guarantees into equity, which would have yielded billions.
