Analyst Note| Joachim Kotze, CFA |
Narrow-moat Rolls-Royce’s trading statement on Nov. 3 did not contain many new insights. Full-year guidance for slight revenue growth, flat margins, and modest free cash flow was maintained. The group finalized its disposal of ITP Aero and used the proceeds to repay GBP 2 billion of loans—this goes some way to restore the balance sheet, but a lot of work still needs to be done to restore its investment-grade credit rating. Cost inflation will be somewhat offset by price escalation clauses, while supply chain disruptions will result in higher inventory levels. Rolls-Royce is trying to sell the long-term story of growth in its new markets segment, which includes electric planes and small modular nuclear reactors. Although we believe Rolls-Royce has the capabilities to invest in these growing markets, they are far from being commercially viable and the medium-term prospects of the group will rest on the performance and recovery of the civil aerospace segment.