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  • Writer's pictureIshfaaq Peerally

Rolls-Royce Stock Analysis

Rolls Royce Stock Analysis

Business Description:

  • Civil aerospace business accounted for 51% of revenues in FY19 and 41% in FY20 (ended in December 2020)

  • Industry hit by Covid-19 Pandemic in 2020, causing a 37% drop in revenues in Civil Aerospace business segment

  • Focused on widebody aircraft engines

  • Has 55% of market share of widebody order book as of 2019 with 43% of market share in 0-10 years old widebody and 12% in 20-30 years widebody. Typical widebody retirement window is 25 years

Rolls Royce Stock Analysis
  • Defence accounted for for 20% of revenues in 2019 and 29% in 2020

  • Main product fighter jet engines

  • 50% from US military contracts, 25% from UK and the rest exports to other countries such as India and Japan

  • Power Systems accounted for 22% of revenues in 2019 and 22% in 2020

  • Provider of high-speed and medium-speed reciprocating engines, and complete propulsion and power generation systems

  • Total Backlog of GBP 53.7 Billion in 2020 vs GBP 60.9 Billion in 2019


  • Recovery of from the pandemic

  • Stability of the defence business

  • Growing market share in widebody aircraft engines


  • Lower demand for new aircraft

Rolls Royce Stock Analysis
  • Raising capital through share dilutions

  • Brexit may affect exports to the EU and relations to main customer, Airbus

  • Currency fluctuations

Financial Analysis:

  • Revenues of GBP 11.8 Billion in FY20 down from GBP 16.5 Billion in FY19

  • Operating loss of GBP 2.27 Billion in FY20 vs loss of GBP 956 million for FY19

  • Net loss of GBP 3.17 Billion in FY20 vs net loss of GBP 1.31 Billion for FY19

  • Negative Free Cash Outflow of GBP 4.2 Billion in FY20 vs FCF GBP 873 million for FY19

  • Balance Sheet

    • Total assets: GBP 29.5 Billion ; total liabilities: GBP 34.4 Billion; book value: Negative GBP 4.9 Billion

    • Cash: GBP 3.3 Billion, debts: GBP 4.2 Billion, current assets: GBP 14.6 Billion, current liabilities: GBP 13.9 Billion

  • 6.3 Billion shares outstanding vs 5.9 Billion in FY19

  • GBP 2.0 Billion may be raised by issuing new shares


  • My personal Biases:

    • Skeptical about their optimistic forecasts

    • New to the Analysis of the Defence and Aerospace Industry

  • Assumptions for base case:

    • 65% of 2019 Civil Aerospace revenues in 2021, 80% in 2022, 90% in 2023, 100% in 2024 and 105% in 2025

    • 3.5% annual growth in Defence Revenues

    • 3.5% annual growth in Power System Revenues

    • 3% annual growth in other other revenues

    • Civil Aerospace gradually improves on operating margins until 5% is reached in 2025

    • Power Systems and Defence maintains an average operating margin of 13% each

    • FCF discounted at 15% with terminal growth rate of 3% after 2025

    • Use Price to FCF ratio as exit multiples given correlation between Price and FCF

    • Price to FCF ratio ranged from 5 to 240 (due to very over the TTM FCF) in last 10 years

    • Use Range of 5-20 for exit multiples

    • Share dilution of 20% in the next 5 years

    • Bear case 0.6% of base case FCF and bull case 1.2% of base case FCF

Rolls Royce Stock Analysis
Rolls Royce Stock Analysis


  • Overvalued with intrinsic value of GBP 5.7 Billion with market cap of GBP 8.8 Billion

  • Exit Multiples based on P/FCF shows only a 10% annual expected returns in 5 years with a big downside in worst case scenario

  • Big margin of safety needed with all the uncertainties surrounding the industry

Rolls Royce Stock Analysis

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