• Trading in line with guidance
• Good growth forecast
• String of new contracts
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.
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.
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.
SHARE TIP UPDATE:
Rolls' shares are up over a third in the past 12 months, so it’s little surprise they’ve taken a breather. Still, at 820p they trade on a forward PE ratio of under 14, dropping to less than 13 in 2013. Given solid growth forecasts and the fact high margin services business generates over half its revenue, the shares rate a buy.
Last IC view: Buy, 773p, 9 February 2012