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LiquidSky
Thank you for your well reasoned and considered response. I don’t necessarily disagree with anything you say. I am glad of our exchanges and would hope the forum is the better for it.
If you read back over a few of my posts, you may get a ‘feel’ for where I am coming from. I believe in Rr and I like (and am proud of) it as a company. I am a strong buy and hoping to increase my holdings.
It is the relentless, unrealistic ramping on here (£1.50 by August etc, etc) that causes me concern especially for people who get sucked in and I want to counter that by outlining some of the potential risks.
If I were to say ‘there could be a war between the West and Russia (or China invades Taiwan) in the next 6 months’, that does not mean, (a) I want a war, or (b) I expect one. Nor does it mean I must be shorting the market.
With Rolls, there are parts of their accounts that irritate me like taking a loss on hedging in 2020, booking a profit on FX in 2021 and then taking another massive loss on hedging in H1, 2020, as an example. This smacks of massaging and an indicator of how desperate they were in 2021. But things have improved enormously since then and overall I believe Warren East has done an excellent job saving the company during the pandemic. Also I am hopeful in Tufan , the new ceo, as (a) he has something to prove being passed over for the ceo position at BP, (b) he is required to hold a higher number of shares in rr than his predecessors, (c) he is taking a gamble accepting so many shares in compensation for the loss of awards at GIP and (d) he has a reputation for cutting costs/restructuring and getting results quickly. (And with a Scottish chairperson known for being good with money!)
In summary I am hoping for £1.50 end of 2023 or early 2024, I think the sp will jump after completion of IPT sale and any DOD contract award, to around £1 (maybe £1.20) but then drift back down till the results in early 2023. That’s all a guess, and I won’t be upset if it hits early 70s or, heaven forbid the 60s, … all that is just a topping up opportunity.
People may not like what I say (or prefer I didn’t say it) but at least they’re getting an honest, unvarnished personal opinions.
LiquidSky,
I was in a tearing hurry earlier and didn't have time to read the link you posted (nor check-read my reply for coherency), but I have now.
So as we all know, the point of hedging any trade is to mitigate huge exposure and effectively lock-in a margin should parameters change during the period of market exposure.
There was an ongoing joke on my desk at Berisford, the punchline of which was often used to excuse some blunder or other. The boss used to require whomever was going to the snack shop next to our building in Mark Lane, to pick-up for him any number of obscure items, not necessarily always in stock at a City mini-mart. So one day, my mate comes back with all our orders of crisps, sausage rolls, Mars bars etc. and hands the boss a pork pie. The guvnor is immediately animated and incandescent with rage. "What the **** do you call this you ****, I asked you to get me a ham and Swiss sandwich with Dijon mustard and you bring me a pork pie? What the ****?
"Calm down, no sandwiches left ---- it's a hedge".... We were literally ROTFFL (I guess you had to be there) - but my point is to illustrate that if you are setting out to hedge a deal, you don't take a huge position over a large spread of time which is inflexible and can't easily be adjusted - because that just isn't a hedge, any more than a pork pie is a hedge for a poncy ham sandwich. So I'm still left pondering how such a monumental exposure was left to fester at RR.
Thanks for that, LiquidSky!
However, my point really boils down to the point that the hedging catastrophe smacks of negligence. Stating the obvious, but because currency movements can be so violent and unpredictable, they need constant appraisal and adjustment. With a company the size of RR, one would like to think they have a dedicated Fx department whose sole job is to tailor their exposure according to the ongoing business, good or bad.
Grezz,
there are already numerous posts regarding the FX issue. In a nutshell, the overambitous treasurer / CFO has built up a hedge book of >30bn (mostls GBP/USD) at a rate of USD 1,52. The volume was based on their business plan pre-COVID with the result that not only the hedge rate is ****ty, but he also substantially overhedged, since the expected turnover was , is and will be substantially lower than what was hedged. The latter is partiularly annoying, because there is a difference if you have hedged Dollars you actually have of if you dont have them and need to buy them. Buy them expensively that is. And that has (and will further!) cost RR a ****load of cash.
for more (or better) explanation , pls read here (old , but correct):
https://seekingalpha.com/article/4371141-rolls-royce-when-just-hedging-loss
The more I think about it, that currency hedging loss doesn't sound right to me. My first job in the City was with one of the biggest commodity trading companies of the day, Berisford, for those with a long memory. From day one it was drummed into us junior traders to cover our currency exposure the moment a contract was agreed. This was of course before the Euro was established so we had myriad earning streams in local currencies. We got away with a load of shizzle back then, but failing to cover the currency risk on a deal was a serious no-no. Now obviously RR's business is miles away from commodity trading, but it beggars belief that they could make such a gross error or currency exposure. Does anyone, having read the accounts, have a clearer picture and explanation?
Hi again,
thanks for your constructive response. I understand where you are heading at, and i agree to the reasoning as such - i only disagree to scope and probbability. As you rightfully say, the FX losses are calculated M-to-M on a daily basis and the situation may deteriorate further. Notwithstanding this, the 2022 FX hedges (amounts and maturities) are already determined and cash settlement costs have been quantified at 61m based on the june 30 exchange rates. The USD would have to rise more than substantially to drastically change this and the probability of that happening...(although i admit that i havent checked if the notional amount of the 2022 hedges are mentioned somewhere, but with 61m M-to-M they cannot be zillions)
Secondly, i doubt that RR will spend any significant amount on SMRs during the 2nd half of 2022 and anyway, that would have zero impact on profit. Yes, its very capital intrensive business, fully agreed - but there isn't even a proper political decision taken. Impact on cash, in my view, low to zero.
WC/ Inventory build up is a fair point, but again i don't see this as a life-threatening issue - especially when it's WC requirements due to larger order intake. I hope we can at least agree that that would rather be a good thing.
The activist investor can dance Lambada at the next AGM, if he wants, but do not believe that is relevant to your stament that RR would have to have a RI or major divestment in case the 2022 FY results are a loss.
Again, i fully agree to the risks you identified, i just differ when it comes to scope and impact.
Hi Liquid,
So the reasoning is as follows - H1 includes a hedging loss of £2.2B which at the moment is a) only on paper and b) assumes a particular exchange rate to calculate the loss.
These hedging contracts start to expire over time and when they do those hedging losses turn from paper losses (already provided for so not an issue) into cash losses.
Second, as the dollar is a haven asset in times of uncertainty and recession, if we head into recession the dollar is expected to strengthen from here, so causing both further paper losses and cash losses.
In addition you have to upfront cash expenses of building the manufacturing facilities to produce the SMRs. These have to be built quickly if the timetable of 2030 is to be met. This is investment but requires cash or borrowing to fund. Lastly you may have further inventory build up due to supply chain issues and further capital investment needed to ramp up production for all the orders in both power systems and defence.
If civil aero flying hours continue to increase and provide positive c/f then rr can cope with the other cash requirements but if there is a another lockdown in China, US etc this winter, war or deep recession then that’s where the risks arise.
One other point is the American activist investor who knows rr is worth more in the short term if broken up, so may apply pressure after year end results, if they are poor.
As it say it’s a worst case scenario to all the super positive posts on here.
Baronbog,
while i think that it's good to hear critical voices, too, I expect them to be well-reasoned - especially whe atstaments lije these are made
"If RR report a full year loss, then it’s either a RI or we have to flog one of the divisions… defence is probably worth more that the total capitalisation of rr atm!"
What makes you write that? Following the last RI, RR is sitting on a massive amount of cash. There are no debt maturities before 2024 and the net (debt) leverage post-ITP proceeds is almost at an investment-grade level. Cash burn has stopped. Legacy issues, except the FX fukcup are settled. No RI without liquidity problems or overindebtedness.
So, in my book your statement doesn't seem very well-reasoned and creates unnecessary anxiety.
Unless of course you expect a MASSIVE FY loss, but then i would like to see the circumstances under which this could happen.
yep!
https://simpleflying.com/korean-air-q2-profit-four-times-q2-2021/
@tiger100 gets it.
No I don't agree. Setting up the frequency is an output setting on the generator, it's not a power production issue.
The reactor makes the steam, the steam drives a generator. It is childs play to attach whatever generator you wish.
BDC
Are we not talking semantics here? Rr SMR generate electricity at a frequency of 50Hz and this can not be adapted easily or efficiently for the US distribution network hence the need to redesign their SMR to generate electricity at 60 Hz.
The important point is that Rr will not be initially selling their SMRs in American. Do you disagree with that?
baronbog,
I can only assume you got the wrong end of the stick if they were talking about distribution systems and not power generation systems which is what SMRs are.
You can literally generate electricity from Pig $hit using a bio-digestor that creates methane that you burn in order to generate heat which can then become electricity. So even pig $hit is compatible with the US electrical system.
It's okay to post some of the risk, but let's at least be honest about what the risks are. The US having an incompatible electricity system or the world suddenly having an urge to buy cheap Chinese copies aren't risks for RR.
BDC
I can only tell what the nuclear RR people said at their exhibition in Whitehall a few months back. I am not an electrical engineer but he explained something about the electricity being generated at different Hz frequencies in the Europe and US and would need a redesign/readjustment of their SMR product.
As such that’s why I suspect they are supporting NuScale in the US with their different designed SMR and not pushing their own.
If you think I am wrong, (and I could be) why don’t you email investor relations and ask?
I can only reiterate I am a strong buy on Rr, have a significant shareholding holding and am not hedging or shorting.
There are lots of upsides with Rr but I am posting some of the risks, to add balance the desperate, blinkered, over exuberant posters on here.
Just to be clear.
Anyone telling you that the US won't buy SMR's from RR because their electrical distribution system is different, either;
*doesn't have a clue what they are talking about
*doesn't understand how electrical generation & power systems work
*both
*has a short on and thinks trying to frighten PI's out of their long positions by tell porky pies on a BB that hardly anyone reads can move the market for them (it doesn't).
baronbog,
The electrical distribution system of the US has nothing to do with how the electrical power is actually produced. They just use different transformers to sort that out.
BouncyDeadCat
I agree with you completely. China, as outlined in the recent unprecedented FBI & MI5 joint press conference, are the greatest longterm threat to our economies and security.
It is orders in Turkey, Africa, ME and the Far East, that could be the issue.
Btw RR are not currently planning to sell their SMRs in the US because the Electrical Distribution Systems are different between the US and Europe.
baronbog,
Agree that there are risks, however let's at least be realistic about some of the one's you've listed.
The west didn't trust the Chinese to build their mobile networks (even though their 5G technology was superior and cheaper than anybody else). There's no way they're going to trust them to build and install nuclear reactors on western soil.
Convb
Sorry to burst your bubble.
Still waiting for the ‘inaccuracies’ to be highlighted and for them to be ‘corrected’ by you? I will bow down to the excellent ‘in your research and conviction’.
Perhaps if you spent more time welcoming alternative views to your own, that might be more helpful than incoherently attacking posts and throwing insults. It would encourage other responsible posts and this board might be a better place?
Or perhaps you prefer posts from Mike1234567?
Barandog
You are a muppet.
Your post was terrible and the vast majority of smart users of this board understood the point I was making.
The time frames of your post are also wildly inaccurate.
And did you know as the Rolls technology for SMRs as proven for last 60 years does not require a prototype to be built - thats how much confidence there is. Regulatory approval in 2024 or sooner - although orders will be in before then. Construction of an SMR is 555 days.
Your post was awful - worst one in a while - congratulations.
Oh golly convb, you are such a fool. Do try and keep up!
First if you re-read my post in relation to NuScale you will see I was responding to Phill111 in his comparison of the power output of the Rr design v the NuScale design. Everybody on here is aware Rr and NuScale are working together, especially if they were reading the links posted.
Secondly, and here is where you really made a fool of yourself, the 2nd link you posted is to a completely different Rr nuclear technology and has nothing to do with SMRs. Not sure how you got that one wrong?
Sunde....I am invested here and have been since taking a position during the heavily discounted RI in 2020, BUT it is a small part of a widely distributed portfolio which I run . My comment reflects accepted principles on portfolio distribution to protect from an unforeseen event damaging an individual investment. NO SINGLE SHARE should represent 20% of a portfolio, that's not investing that's gambling.
Baronbog.
Your post is naive and full of inaccuracies,
This board is being run over but bloaters like yourself posing as some sort of expert.
I have been invested in Rolls for over 2 years for the SMR - so to read your post inspired be to correct you.
Firstly Nuscale and Rolls are working together - as Nuscale need Rolls manufacturing skill;
https://www.world-nuclear-news.org/Articles/Rolls-Royce-backs-NuScale-SMR
''President of Rolls-Royce's nuclear business Jason Smith said, "Rolls-Royce has a large US manufacturing footprint and a rich 50-year nuclear heritage spanning reactor and component design and manufacture through to operational support, obsolescence management and plant life extension."
Involved in the UK's naval nuclear program since 1959, Rolls-Royce boasts a significant nuclear skills base with a large existing nuclear-certified supply chain. The company lists fuel handling, reactor maintenance, re-fuelling processes, non-destructive examination techniques and what it says are "unique decommissioning and waste handling capabilities" amongst its offerings to the nuclear industry.
NuScale CEO John Hopkins noted, "With the addition of Rolls-Royce's world class manufacturing capability to the NuScale team, we bring a wealth of experience to the development, production and maintenance of advanced nuclear technologies across global markets."
Secondly;
https://www.autoevolution.com/news/rolls-royce-one-of-the-big-five-to-build-the-first-us-advanced-nuclear-microreactor-195006.html
'Rolls-Royce One of the Big Five to Build the First U.S. Advanced Nuclear Microreactor'
Your analysis of number is awful - stick the to day job.
And just because you wrote a long post doesn’t mean you are smart.