Rolls-Royce hits turbo speed. Now keep going for a decade
Back in February, Erginbilgiç was able to declare that the 2027 targets for operating profits would be hit two years early, so he set new ambitions for 2028. Six months on, even the refreshed numbers look conservative. After a strong first-half, Rolls now thinks it will make £3.1bn-£3.2bn of operating profit over the whole of 2025, or about £300m more than previously advertised. At the current rate of rapid progress, it looks a short hop to £3.6bn-£3.9bn in 2028.
The shares rose 8% and touched £11 for the first time. Three years ago the price was about £1. A business that required a £2bn rescue rights issue in the pre-vaccine depths of the pandemic in 2020, is now the fifth largest company in the FTSE 100 index and valued at £90bn.
Naturally, Erginbilgiç's share-based 'golden hello' has followed in lock-step. To lure him from the private equity sector, he got £7.5m-worth of Rolls shares when they were 91p in January 2023. That package is now worth a cool £90m, albeit locked up in tranches until 2027 and 2028 (a reassuring detail from the point of view of shareholders).
The story of how it has been done is well known by now, even if the pace continues to surprise. Erginbilgiç reorganised Rolls' top management, removed a layer of costs, culled wasteful sidelines and, critically, invested in the reliability of the engines to allow a 'win-win' renegotiation of contracts with airlines. Rolls, a company famed for years for falling short on cash generation, is now churning out the stuff.
Meanwhile, markets everywhere are helpful. Demand for civil engines has fully recovered from the pandemic. The Aukus submarine partnership, where Rolls supplies the propulsion systems, underpinned the defence side even before Nato governments pledged to spend more on heavy equipment. Even the unloved power systems division has been knocked into shape in time for the age of datacentres that require backup generators.
So the next question is whether the news can get any better. Can Erginbilgiç possibly maintain the pace?
Well, there are two reasons to take seriously his talk about 'substantial growth prospects beyond the midterm'. One is the bet on small modular reactors, or SMRs. It is still early days but the UK has ordered three and the Czech Republic six, so we will eventually discover whether these scaled-down nuclear plants can be built on time and on budget. If the answer is yes, then possibilities open up. Like the Czechs, the rest of eastern and central Europe probably wants a cost-efficient alternative to Russian gas. Power-hungry 'hyperscale' datacentres in the US represent another set of potential customers.
The SMR unit will be 'profitable and cashflow positive by 2030', said Erginbilgiç. Before that date, we may be asking what the operation would be worth as a spunoff, separately listed company – Rolls has a 62% stake at the moment.
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The other potential biggie is engines for narrow-body aircraft. Rolls is currently exclusively widebody, but its UltraFan development engine is intended to be capable of being adapted for both markets. The enormous costs mean Rolls would need a partner (the City's guess is Pratt & Whitney), a committed airline customer and would probably demand government support. But the narrow market is much larger than the wide one – it could be genuinely transformative for Rolls.
A cynical view says something always goes wrong at Rolls sooner or later, which was the experience over a couple of decades of false dawns. If there is a difference this time, it is that the company is finally producing heaps of cash, which is the real measure of success in its business. Don't mess it up: the UK engineering sector needs a reliable world-leader.
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