By Courtesy of XTRMNTR part 1/231 Jan 2025 20:04
Stephen Anness, head of global equities at Invesco and manager of Invesco Global Equity Income Trust (IGET), explains why the trust invests in Rolls-Royce (RR.):
"We have followed Rolls-Royce for over two decades, and have always viewed the business as technologically strong, operating in an industry with enormous barriers to entry and offering great visibility on what the company would still be doing 10 or even 20 years into the future. Sadly, it was frequently let down by its operational efficiency, which management teams had failed to get to grips with.
"The share price peaked in December 2013. In the years following 2015, the business tried to reform under a new chief executive, Warren East. While a market leader in engineering, it was a market loser in financials (bloated costs/headcount and bureaucratic in nature); meanwhile, an issue with the Trent engine family led to planes being removed from service and to significant costs. By 2020, the business was pretty much loathed by sell-side analysts. They had given up on the turnaround by this stage – it was seen as too difficult and too complex.
"We were intrigued by the market capitulation; the shares falling near 50 per cent between 2013 and early 2020 looked like an opportunity. We felt that the core business was very high-quality – for example, the company commands a 50 per cent market share in engines for wide-body aircraft, which provides a long runway of maintenance/spares revenues, often spanning multi-decade periods. A great example is the Dart turbo engine, which has been in service since 1945 and is still operational. We initiated a position in the trust at this stage.
"The business had often overpromised and underdelivered. Cash generation had been patchy and the accounting is complex. This was central to our debate: could the business actually change? Covid-19 provided the burning platform needed to accelerate change; it was indeed an existential threat. The share price fell to 44p and the balance sheet was extremely stretched. To survive, the company had to increase the pace and scale of cost cuts and launch a £2bn rights issue.
"Tufan Erginbilgic replaced Warren East as chief executive at the beginning of 2023 and has continued to drive cost cuts and divestments. In that year, the business generated £1bn free cash flow, as it recorded its biggest engine order haul in 15 years. Strong financials allowed Rolls to repair the balance sheet, reinvest in new technology and maintain its market position.
"Rolls-Royce has gone through a remarkable transformation. The new management team has done an outstanding job; cost and complexity have been grappled with, free cash flow has been strong and we have seen record new orders for engines.
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