Rolls-Royce (LSE:RR) shares have been a near-ever-present feature of the FTSE 100. The engineering firm has been at the forefront of British hard tech for decades. However, the last three years have not been positive for the brand synonymous with reliability and precision engineering.
So, what’s next for Rolls-Royce? And as a shareholder, should I buy more, or should I sell?
A multi-billion dollar reason to buy
Let’s start with the good news. Last week, it was announced that the US awarded the contract for its Future Long-Range Assault Aircraft, FLRAA, to Textron‘s V-280 Valor project. Rolls-Royce provides two AE 1107F engines to power the V-280 Valor.
The programme will replace Black Hawk utility helicopters and Apache attack helicopters — these two aircraft numbered 2,000 and 1,200. First delivery of the V-280, a tiltrotor aircraft, is expected in 2030.
Rolls-Royce stated in its 2021 annual report that a win for Textron would secure a market of over 5,000 engines for the UK-based engineering giant. Production, the firm said, is expected to last for decades.
“We estimate that the total value of the V-280 program for Rolls-Royce could reach up to $5-6bn in production and $6-7bn in services assuming 5,000 installed engines are delivered“.
This is clearly a huge boost for the firm.
Headwinds and tailwinds
Last month, Rolls pointed towards an improving outlook. Civil aviation — its biggest segment — is getting back to pre-pandemic levels. The company, which gets paid when engines are airborne, said hours flown by its customers were now at 65% of 2019 levels.
Meanwhile, the other two segments, power systems and defence, have been progressing well. The tragic war in Ukraine has not had any material impact on the latter segment to date, but defence spending generally is expected to rise.
Meanwhile, the power systems division — which provided 25% of overall revenue last year — reported order growth of 53% to £2.1bn over 12 months.
Rolls has also been working hard to pay off its debts. It completed a £2bn sell-off of business units in September. Outgoing chief executive Warren East said these funds were used to pay down near-term debt.
However, Rolls still has £4bn in debt obligations — all on fixed interest rate terms — maturing between 2024 and 2028. That’s likely to impact profitability moving forward.
A healthy order book in power systems and defence provides a strong platform and visibility going forward, but there are still concerns about civil aviation. Much of this is dependent on a reopening in China.
The Emirates’ airline president recently said that when Covid-restrictions in China are lifted, the country will “unleash demand, the likes of which we will not have seen for a long, long time“. However, we still don’t know when that will happen.
Personally, I see a lot of upside with Rolls-Royce. I’ll be adding more to my portfolio before 2023.
