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I’ve been feeling smug ever since I bought rolls royce (LSE:RR) on November 1, as they are up a third since then.
It seems I understood my timing, after watching them slide relentlessly for five years or more while I bided my time. Or so I thought, until I saw a brutal demolition of the FTSE 100 the company’s prospects by none other than its new boss.
For once I got my time right
CEO Tufan Erginbilgic began his tenure at the aero-engine maker by confronting staff with some uncomfortable truths. He called the engineering group a “rig on fire” and said “Given everything I know about talking to investors, this is our last chance”.
He added that Rolls-Royce had “I haven’t been acting for a long, long time”his position was “untenable” and the Covid was not to blame. Of course, Covid had a negative impact on revenue, given the collapse in international and long-haul travel, but Erginbilgic no longer wants staff to use that as an excuse.
Being generous, I would call it tough love. Alternatively, it could backfire badly by undermining morale as job losses loom. He is certainly taking a very different approach from former boss Warren East, who claimed in 2021 that the company was “on the way to growth” after a nightmare in 2020, when it posted £4bn of losses and eliminated thousands of jobs.
Despite the recent recovery, Rolls-Royce shares are still down 10.27% in one year and a staggering 64.85% in five years. I could find myself celebrating the rebound of a dead cat, unless Erginbilgic can match words with action.
Rolls-Royce is not a completely burned out case. In December, it secured up to $5-6 billion in production and $6-7 billion in service contracts from the US military. It could also enjoy takeoff as China reopens, which is expected to trigger a strong recovery in air travel as Rolls-Royce’s jet engines are on a lucrative mileage-based maintenance contract.
Now the really hard part
Debt is no longer the concern it once was, having paid off £2bn last year, though it still has £4bn of outstanding debt.
This was much appreciated and saved Rolls-Royce from collapse without turning it into the booming business we would like to see. Erginbilgic has to achieve that, somehow. You can’t trust your people skills, that’s for sure. Nor can it pin its hopes on further cost reduction, given that East has been doing it for years.
That may boost the group’s slim 4.6% profit margins, but what investors really want is for the company to take the lead and start growing again. His proposed fleet of mini-nuclear reactors is promising, although it depends on the UK government finally getting its energy policy together, so that’s another concern.
I’m delighted that I bought Rolls-Royce shares when I did, but I’m in no rush to increase my holding. I bought them because they had fallen so low that they looked cheap. That moment has passed. Now I’m going to wait and see if her new macho boss will turn this box around or break it for good. It will be one or the other.
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