Rolls-Royce (LSE:RR) shares dipped early on Thursday after the company published a trading announcement. The stock has been one of the best performers on the FTSE 100 over the past 12 months — up 99% — much of this growth coming in the last six months.
So, what could be next for Rolls-Royce shares? Has the stock peaked or is there further to go?
Guidance maintained
On Thursday, Rolls said its financial performance was in line with expectations at the time of the full-year results on 23 February.
Underlying operating profit guidance sits at £800m-£1bn and the company maintained free cash flow guidance of £600m-£800m for 2023. “We anticipate our free cash flow generation will be seasonally weighted in the second half of the year, as previously indicated,” the company added.
Other key features included:
- Large engine flying hours (EFH) were 83% of 2019 levels in the four months to 30 April, and on track for the 80% to 90% range for the full year.
- Continued progress in defence including the announcement that the AUKUS submarine programme will be powered by Rolls-Royce nuclear reactors.
- Improved pricing on new orders in power systems to drive margins going forward.
- Efficiency drive, including the closure of the R2 Factory venture, starting to bear fruit.
Shares push down
In early trading on Thursday, the shares fell almost 4% despite Rolls holding its guidance. It seems shareholders were somewhat disappointed. That’s probably because over the last six months, we’ve seen Rolls surprise in a good way. This time, it was just holdings its own guidance.
Price targets
Price targets remain high for Rolls. In March, UBS nearly doubled its target to 200p from 105p. The bank’s analysts said the shares were “abnormally cheap“, despite China reopening. That same month, Citi lifted its price target to 255p as it cited “a clear route to much better cash flow“.
So, clearly these major institutions think there is further to go. A key part of any share price will be managing debt. Net debt remains problematic at £3.3bn, and this will continue to drag on profitability.
Standard and Poor’s raised its rating for Rolls-Royce long-term debt to BB with a positive outlook in March, and this could see a debt return to investment standard within the next year or so — that’s a big plus.
What’s next?
Rolls is moving into the “development, manufacture and sales of small modular reactors (SMR) and new electrical power solutions“. But that’s not something I’m looking at too closely yet, apart from on a cost basis.
The big story remains civil aviation. This part of the business suffered during the pandemic, and the recovery of large engine flying hours is key to company’s profitability moving forward. As we can see from the below, the segment is responsible for a large part of revenues.
| 2022 performance by segment | Revenue (£m) | Operating profit (£m) |
| Civil aerospace | 5,686 | 143 |
| Defence | 3,660 | 432 |
| Power systems | 3,347 | 281 |
| New market | 3 | (132) |
| Other (including corporate) | (5) | (72) |
| Totals | 12,691 | 652 |
Personally, I still think Rolls has further to gain. However, these share price gains probably won’t be realised until there’s further evidence that the company is getting back on track. The stock is still down around 48% versus pre-pandemic levels. There’s plenty of recovering to do and that’s why I’ve continued to top up my position.
