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Correction* as long as revenues exceed variable costs
Pokerchips I don’t agree with your response to RedBox there is a big difference between Aston Martin and Rolls Royce. Many people don’t need a fast luxury car however when I travel abroad I need there to be engines on the plane. Another example is from one of Rolls Royce’s 5,000 power and nuclear customers - Irish rail, which needs MTU power packs in order to reach sustainability targets. Furthermore, Rolls Royce provides its products to 160 armed forces and 70 navies which require their propulsion systems.
Rolls Royce has just won an award for Outstanding Industrial Security Achievement in the United States. This could lead to more contracts especially as the next stimulus package is meant to increase defence funding.
Also you mentioned that additional help from the government to the aviation industry is not good. I struggle to understand that. Yesterday there were 67,000 commercial flights tracked. Government help is definitely good as it keeps people employed and helps to prevent bankruptcy. Although airlines are losing money because they don’t have many passengers travelling it is important to recognise that they will continue to operate flights if their revenues exceed their fixed costs which is good for Rolls Royce. In 2008, everybody said the bank shares wouldn’t recover but they did. Travel Will be the same.
LOL Pokerchips I know you aren’t looking at the markets as whole you are talking about amazon for some reason! Unfortunately for you Rolls Royce and Amazon won’t decide the recovery so maybe you shouldn’t have such a narrow minded outlook on the economy. The statement was regarding the overall recovery not Rolls Royce solely and certainly not Amazon as that is completely irrelevant on this forum. Absolute joker!
As the markets cover many sectors it is important to keep a statement like that broad. You shouldn’t look at what each individual stock is doing I personally don’t care if Jeff Bezo sells his shares. I don’t think that Jeff Bezos controls all international markets. You need to look at the markets as a whole. Obviously travel stocks for example will be slower to recover. My statement was regarding the overall recovery and the markets are currently pricing a V shape. I left my personal opinion out of my statement as it doesn’t matter. It only matters what the markets are doing. I personally think the overall recovery will be a U shape as people can leave their jobs quicker than they can get them back and businesses can close quicker than they can reopen. I don’t think it will be a W shape because we have learned how to deal with a surge in coronavirus cases and I don’t think it will be an L shape because governments are engaging in counter cyclical fiscal policies.
Webb’s you told everybody on the forum lastt week that you’ve sold your shares in RR and now you are clearly trying to create fear. An L shape recovery is very pessimistic as the financial system isn’t in big trouble compared to 2008. Credit is flowing and governments are not doing austerity. But most importantly it doesn’t actually matter what we think about economic growth numbers it matters what the markets are doing and right now the markets are pricing a V shaped recovery. They’re assuming however bad the economy gets the central bank and governments will come in to support it.
Yes they did want to sell ITP last year. It sounds like they want to sell assets and then there will be a RI if they need more money but I also agree that they shouldn’t do this if they have good liquidity for the short to mid term especially when the SP is so low however, IAG are in a similar position and it looks like there will be a RI for those shareholders
Pantz I was thinking the same thing. If their liquidity is as strong as they say it is they’d be better off selling assets and then going down the RI route next year if it is needed.
Hi Slavo hope you are keeping well. It has been stated by the firm that the new issues with the Trent 1000 will not lead to "mass groundings or any other serious reactions." Good luck
On 11 July 2016, Rolls-Royce Holdings announced that it was in the process of purchasing the outstanding 53.1% shareholding in the ITP joint venture in exchange for €720m. Last year, they were keen to sell ITP Aero for £1.3bn but ultimately decided against it. I don’t think investors will be happy with the sale of ITP Aero initially but if it has to be done I don’t think it will affect the long term strategy of Rolls Royce as they were keen to sell it in the past when the aviation industry was still booming.
You’ve done work for the company for 25 years and you are unaware that they don’t make engines for the 737 MAX!!! Furthermore, you have no charts or reasoning behind your statements except that “bad news” is coming. RR has had a lot of bad news all investors are aware of it’s current position and it’s been priced in. If you have strong reasoning behind your predictions in the future I would love to hear it but once you start making false predictions like “100p in a month“ (back in March) I find it hard to take your points seriously.
Casa I don’t think you know very much about this firm in April you said that Rolls Royce will do badly because the Boeing Max is not flying. This has no impact on RR. In March you said that within one month the price will be 100p which never happened. Yes the share price has been dropping rapidly however, it looks like the stock is consolidating at the moment before a possible reversal. GLA
I can’t see it going bust. It provides 3% of U.K. exports and with brexit isolating the U.K. it will need companies like this. Yesterday, government ministers said that it was essential for the country that Rolls Royce succeeds. I think we will see more defence contracts coming RR’s way.
Casajaluma the Fitch rating and the possibility of placing have already been calculated into the current price.
Casajaluma this stock will not drop another 63% to 100p. The share price hit 235p during the height of uncertainty however, we have now been provided a roadmap to recovery. Today all travel, aviation and defence stocks are down (BAE systems, Meggitt, Carnival, etc.). Stocks go up and down which is ok as long as the overall trend is positive. I may be wrong but I believe that we are at the start of a bullish trend. Below I have attached the reasoning behind Panmure Gordon's evaluation of Rolls Royce and it makes a lot of sense.
Management “is looking at options to strengthen its balance sheet and position itself for the recovery”. If the options do not include a meaningful change in corporate strategy, then we have little to recommend to equity investors. Management can and must address the fundamental problem: the asymmetric Civil Aerospace business model which barely covers the cost of capital in incident-free years but amasses heavy losses quickly. However, we believe the share price is already discounting a heavy cost (c£5.2bn) of exiting Civil activities. Our sum-of-the-parts model, which assumes that Civil Aerospace could be divested at a much smaller cost of £2.5bn, values the shares at 400p (previous TP 387p, based on a DCF model). Hence, we are upgrading our recommendation to BUY. Playing by competitors’ rules: Most of the value in the Civil Aviation boom has been captured by consumers as seemingly unlimited state subsidies worldwide have encouraged a race to the bottom. If Rolls-Royce has destroyed more value than its peers, it is largely because it has had to play by their rules. Today, its primary peers – GE, Safran and Pratt & Whitney (part of Raytheon Technologies) – still enjoy much stronger balance sheets and are more diversified. Exit Civil: Even if we dismiss COVID-19, which caused a £3bn cash outflow in H1/20, as an outlier, the fact remains that in the 2016-19 period, Civil Aerospace accounted for 80% and 58% of group capex and R&D respectively, but generated just 20% (£770m) of the underlying profits. However, the true scale of value destruction only becomes apparent when one adds the £2.4bn exceptional cost of dealing with Trent1000 blades. RR lacks the differentiation to charge a premium so unless GE changes its pricing, it risks further value destruction. It should look to divest the business to P&W, which currently has no offering in the widebody market. Sum-of-the-Parts Valuation: we have previously used a DCF model to generate a fair value. Given the huge impact on cashflow due to COVID-19 and prospects for balance sheet restructuring, we are now adopting a sum-of-the-parts model. We value the Defence and Power Systems businesses at 11x and 9x 2019 EBITDA. Based on this, we believe that the market is currently assuming Civil Aerospace has a negative value of c.£5.2bn. We believe that this business can be transferred for nil value leaving RR with outstanding liabilities of £2.5bn. This generate a value per share of 400
Hi Pokerchips this won’t have an impact on RR as Ryanair does not use RR engines. Ireland will be publishing their “green list” countries next week. The government is also deciding whether or not mandatory testing for people from high risk countries is practicable.
I don't mean this in a contentious way but just thought I'd share my opinion.
Placing wasn't mentioned in the trading update this morning. It is clear from the update that liquidity remains strong. In my opinion Rolls Royce are just considering placing as an option in case airlines are forced to cease operations for a second time. It would be foolish for management not to look into this.
Furthermore, the cash outflow is expected to be a lot lower for H2 as stated by the trading update this morning. There are so many problems the company is facing however, I believe that it has a bright future. GLA
Hi Ricky hope you are keeping well. I agree that Rolls Royce has a number of serious issues which it must overcome however, it has been stated by the firm that the new issues with the Trent 1000 will not lead to "mass groundings or any other serious reactions." Furthermore, the company is on track to be single digit aircraft on ground very soon and this news could even be announced on Thursday.
In relation, to the impending trading update I believe that investors will be more focused on how successful the firm has been in reducing its cash burn during the pandemic. These mitigations include the minimising of non-critical capital expenditure projects, sub-contractor costs, etc. We have already seen Warren East take an aggressive approach to reducing the company's cash burn in recent months. It is also important to note that Rolls Royce is an extremely diverse firm. 50% of the firms' revenues do not come from civil aerospace. For example, its defence business has emerged from the current crisis unscathed and Rolls Royce has attained new contracts in recent weeks.
While the company may emerge from this pandemic as a smaller firm I cannot see the share price dropping by 28% to under £2 by Friday. Today, £21 million worth of shares were bought while only £14 million were sold this could be due to an increase in investor confidence in my opinion.