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After full-year results, are Rolls-Royce shares the FTSE 100 darling of 2024?


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Rolls Royce’s impressive numbers have pushed the stock ever higher. Can the FTSE 100 blue-chip fly above 400p?

rolls royceSource: Bloomberg
 
 
Written by: Charles Archer | Financial Writer, London
 
Publication date: 

Rolls-Royce (LON: RR) shareholders have enjoyed an excellent couple of years. Despite the value destruction down to less than 39p per share at the start of October 2020, the stock has now recovered to 361p — and has risen by 21.2% year-to-date alone.

With some analysts predicting a rise to 400p amid excellent full-year results, Rolls-Royce shares may once again become the best-performing FTSE 100 stock of this year.

Rolls-Royce share price: 2023 full-year results

With CEO Tufan ‘Turbo’ Erginbilgic taking the reins at the start of last year, few would have guessed the impact. Of course, while the FTSE 100 company has benefitted from the wider recovery of civil aviation, Rolls has improved on almost every metric.

Underlying operating profit more than doubled from £652 million to £1.6 billion, driven by the recovering civil aerospace division, and reflecting the impact of ‘strategic initiatives, with commercial optimisation and cost efficiency benefits across the group.’ For context, the average analyst forecast had been for £1.4 billion, and in further good news, Rolls delivered an underlying margin of 10.3%.

Free cash flow rose to a record £1.3 billion, driven by operating profit and continued LTSA balance growth — while return on capital more than doubled to 11.3%. Statutory net cash flow from operating activities also increased, by £1 billion to £2.5 billion. And importantly in a time of elevated interest rates, the FTSE 100 operator saw net debt fall from £3.3 billion to a much more manageable £2 billion.

Erginbilgic enthused that the company’s ‘transformation has delivered a record performance in 2023, driven by commercial optimisation, cost efficiencies and progress on our strategic initiatives. This step-change has been achieved across all our divisions, despite a volatile environment with geopolitical uncertainty, supply chain challenges and inflationary pressures.’

Where next for Rolls-Royce shares?

While supply chain challenges are expected to persist for the next 18 to 24 months, Rolls-Royce still expects underlying operating profit to be between £1.7 billion and £2 billion in 2024 — with free cash flow to rise to between £1.7 billion and £1.9 billion.

Erginbilgic notes that ‘our strong delivery in 2023 gives us confidence in our 2024 guidance and is a significant step towards our mid-term targets. We are unlocking our full potential as a high-performing, competitive, resilient, and growing Rolls-Royce.’

In the key civil aerospace division, the company expects that 2024 large EFHs will grow to between 100 and 110% of its pre-pandemic level, based on civil net LTSA creditor growth at the low end of the mid-term range of between £800 million and £1.2 billion — compared to £1.1 billion in 2023.

And the 2023 performance and 2024 guidance on operating profit and free cash flow means that by 2024 Rolls will have delivered more than 50% of the improvement set out in our mid-term targets.

For context, it continues to target underlying operating profit of between £2.5 billion and £2.8 billion, operating margin of 13% to 15%, free cash flow of £2.8 billion to £3.1 billion and return on capital of circa 16-18% in the mid-term — all based on expectations for a 2027 timeframe.

Despite widespread speculation, the company has chosen not to make any shareholder payouts for 2023. No dividends is often poorly received by the markets, but not in this case. Rolls did recommit to reinstating and growing shareholder distributions once it’s ‘comfortably within an investment grade profile and the strength of our balance sheet is assured.’

On the other hand, the CEO recently told The Telegraph that he was not ‘ruling out’ building the first small modular nuclear reactors outside of the UK due to the slow pace of approval. The company — in which the government owns a golden share — is one of only three that have submitted plans for regulatory approval in the UK so far and Erginbilgic notes that ‘we are ahead of everyone else.’

For context, SMRs are expected to be partially publicly funded via new body Great British Nuclear and may become a core component of the country’s energy strategy.

Rolls-Royce may continue to rise through the FTSE 100 regardless. JP Morgan has a 400p price target on the stock, noting that ‘a much higher percentage of Rolls-Royce’s long-term service agreements will convert into profit.’ Goldman Sachs has a 370p target — and Citi are most bullish, with 431p the goal.

 
 

 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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