Aircraft engine
Rolls Royce shares jump on ambitious growth plans / Image source: Adobe
  • Shares rally on new corporate plan
  • Operating profit to double in five years
  • Up to £1.5 billion of asset sales planned

Shares in aircraft maker Rolls-Royce (RR.) made a new four-year high on Tuesday after the company laid out plans to double operating profits and make further divestments over the next five years.

The shares jumped 7% to 261p, taking their gains to 260% over the last year and putting them within striking distance of their pre-pandemic trading levels.

The transformation of the FTSE 100 group under new chief executive Tufan Erginbilgic has been swift and there appears to be more to come.

‘Rolls-Royce is at a pivotal point in its history - after a strong start to our transformation programme, we are today laying out a clear vision for the journey we need to take and the areas where we must focus’, explained Erginbilic at the firm’s capital markets day.

The company said current trading was in line with expectations as it reaffirmed full-year guidance.

WHAT ARE THE NEW TARGETS?

The company is targeting an operating profit of between £2.5 billion and £2.8 billion, equating to a margin on sales of between 13% to 15%, and free cash flow of between £2.8 billion and £3.1 billion. The firm is targeting a return on capital ranging from 16% and 18%.

The plan is to reallocate capital to areas where the firm can create the most value and includes divestments expected to generate gross proceeds of between £1 billion to £1.5 billion.

‘We are setting compelling and achievable targets for the mid-term which will take Rolls-Royce significantly beyond any previous financial performance’, explained Erginbilic.

EXPERT VIEW

AJ Bell investment director Russ Mould commented: ‘The early part of this year was all about talking tough about the problems at Rolls-Royce for incoming CEO Tufan Erginbilgiç.

‘His harsh rhetoric certainly convinced the market he was serious about fixing the UK engineering giant’s problems and this has driven strong share price gains.

‘We’re now moving into the next phase where it is less about the diagnosis and more about the cure.

‘For all its problems, Rolls-Royce is a business with some inherent strengths – most notably an installed base of engines on global aircraft on which it enjoys lucrative spares and repairs contracts.

‘For ‘Turbo Tufan’ it is all about backing up his words with action and he has set himself some clear parameters on which his tenure of the company can be judged.’

Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Martin Gamble) and the editor of the article (Ian Conway) own shares in AJ Bell.

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Issue Date: 28 Nov 2023