Rolls’ shares rocketed in 2023, buoyed by improved financial fortunes as it reaped the fruits of CEO Tufan Erginbilgic’s turnaround strategy. Where next?
Rolls-Royce shares soared by circa 220% in 2023, buoyed by recovering civil aviation, increased state defence spending, and a newly appointed energetic CEO with a clear turnaround strategy. Indeed, Rolls was the top performing large cap stock in Europe last year as measured by the Stoxx Europe 600 index.
For context, Marks & Spencer — which re-entered the FTSE 100 last year — returned ‘just’ 120%. However, while Rolls shares are now changing hands just above the 300p mark, multiple brokers consider that the company has further to run in 2024.
But remember, past performance is not an indicator of future returns.
Rolls-Royce share price: results and targets
In August’s half-year results, underlying operating profit came in at £673 million with free cash flow of £356 million reflecting ‘continued end-market growth and focus on commercial optimisation and cost efficiencies across the Group.’
Further, the FTSE 100 operator raised its 2023 guidance for underlying operating profit to between £1.2 billion and £1.4 billion, and free cash flow to £900 million to £1 billion — due to transformation efforts accelerating its ‘financial delivery.’
Then at its Capital Markets Day on 28 November, the company announced a plan to develop a ‘high performing, competitive, resilient and growing business.’ Among other things, this included a mid-term target to deliver operating profit of between £2.5 billion and £2.8 billion, on an operating margin of between 13% and 15% — with free cashflow of £2.8 billion to £3.1 billion and a return on capital of between 16% and 18%.
This is all intended to create an ‘investment grade’ profile for the stock, as part of a strategy to support at least £1 billion of gross disposals over the next five years.
CEO Tufan Erginbilgic enthused that ‘Rolls-Royce is at a pivotal point in its history. After a strong start to our transformation programme, we are today laying out a clear vision for the journey we need to take and the areas where we must focus. We are creating a high performing, competitive, resilient and growing Rolls-Royce.’
Where next for Rolls Royce shares?
Setting financial targets is one thing — achieving them is another. However, city brokers seem impressed. Citi has a price target of 431p, while JP Morgan has set theirs at 400p and Barclays has gone down the middle at 409p. And all three price targets are set with the expectation of being achieved within the next 12 months.
Barclays analysts are particularly positive about the increased expected cash flow — which should boost the net cash position over the next year, allowing Rolls to recover its investment grade credit rating — and also help the FTSE 100 company pay down its debt pile.
Looking beyond civil aviation recovery, increased defence spending, and the promising UltraFan gearbox programme, the next catalyst may be Rolls’ small modular nuclear reactors. Prime Minister Rishi Sunak plans to relax planning ruleS restricting the plants, noting that ‘nuclear is the perfect antidote to the energy challenges facing Britain.’
The long-term plan is to get 25% of the UK’s energy needs from nuclear by 2050, representing some 24GW of capacity, and almost double the 14% of today. The government retains a golden share in Rolls-Royce and has already granted the company some funding to get started. However, the FTSE 100 business still needs to compete for government contracts alongside five other hopefuls, with a winner set to be announced within months.
Erginbilgic came in at the start of 2023 to fix, in his own words, a ‘burning platform.’ The share price performance and near universal ‘buy’ targets suggest more growth may be imminent. But the FTSE 100 company cut 9,000 staff during the pandemic and even more throughout last year. This loss of institutional knowledge could be a problem as demand for services return.
However, given the success thus far, Rolls-Royce remains one of the best FTSE 100 stocks to watch in 2024.
Financial results are due in February.
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