Rolls-Royce applauded for consistency

Rolls-Royce has been in a different league since announcing the sale of its 32.5 per cent stake in International Aero Engines (IAE) last autumn. A strong set of full-year results followed in February and, despite the economic chaos all around, the business remains in decent shape.

Putting aside contributions from IAE and German diesel engine joint venture Tognum, Rolls predicts “good growth” in underlying revenue and profit, driven largely by strength in civil aerospace, though tamed slightly by more modest improvements in defence, marine and energy. Rolls has chalked up significant milestones, too. More efficient Trent XWB engines took to the skies for the first time recently, and new manufacturing and training facilities in Singapore making wide-chord fan blades and assembling and testing large commercial jet engines have opened.

Moreover, ambitions to double organic revenue over the next decade – about 7 per cent a year – look achievable given that massive backlogs at Boeing and Airbus have helped build a £62bn order book at Rolls. In the past few months alone, the group tied up a deal with the Turkish navy, sealed another to support Britain's fleet of Hercules transporters and VC10 tankers, and will supply $136m (£88m) of gas turbines for a sub-sea gas pipeline in the Middle East.

Investec Securities…

Buy. Things move slowly in aerospace & defence, but for Rolls-Royce, a super tanker with positive momentum, that is just fine. The stock is near an all-time high having outperformed on most timeframes and, while we continue to see potential upside to our forecasts over time, for now we suggest the shares are likely to pause for breath. We model 8 per cent underlying revenue growth excluding Tognum and IAE, and maintain our 2012 pre-tax profit forecast of £1.64bn, giving EPS of 59.7p. The next catalyst is likely to be progress on the IAE transaction ahead of the half-year.

Oriel Securities…

Hold. We like Rolls’s long-term growth outlook and see both the Tognum acquisition and the $3bn-plus sale of the IAE stake as positive for the group. However, this is already priced into the stock in our view. What’s more, this will be a year of consolidation, with new management, facilities in Singapore and the US and a major integration programme for Tognum. We are forecasting organic sales growth of 5.5 per cent and, given we do not currently see the catalyst for outperformance from these levels, maintain our hold rating and 840p target price.