Open main menu
Home
Random
Donate
Recent changes
Special pages
Community portal
Preferences
About Stockhub
Disclaimers
Search
User menu
Talk
Contributions
Create account
Log in
Editing
Rolls-Royce Holdings plc
(section)
Warning:
You are not logged in. Your IP address will be publicly visible if you make any edits. If you
log in
or
create an account
, your edits will be attributed to your username, along with other benefits.
Anti-spam check. Do
not
fill this in!
== Valuation == === What's the expected return of an investment in the company? === The Stockhub users estimate that the expected return of an investment in Rolls-Royce Holdings plc over the next five years is '''negative 1%'''. This value was arrived at through the use an intrinsic valuation in the form of a discounted cash flow model. Assuming that a suitable return level of five years is 10% per year (based of the S&P 500 returns) and Rolls-Royce achieves its return level of negative 1%, then the company can be considered, within fair margins, as fair-valued. === What are the assumptions used to estimate the return? === ==== Key Inputs ==== {| class="wikitable" !Description !Value !Commentary |- |Valuation Model |Discounted Cash Flow and Comparable Company Analysis |Two main approaches can be used to estimate the value of an investment: # One form of intrinsic valuation is the discounted cash flow model where future cash flows are discounted to the present value. # Comparing key financial metrics of the company to other similar investment Research has suggested that to estimate the expected return of an investment over a long-term investment horizon, a discounted cash flow model provides an accurate projection. |- |Financial Projections |Stockhub, CapitalIQ, Yahoo Finance |To improve the reliability of financial projections, a mixture of sources was used when projecting key financial metrics such as revenue. |- |Discount Rate |WACC |The weighted average cost of capital was used as the discount rate as it expresses the return that both bondholders and shareholders demand to provide the company with capital. The cost of equity and cost of debt have been calculated in the tables provided below using values taken from the company's financial statements, beta for the stock, and expected market returns. |} === Discounted Cash Flow Model === {| class="wikitable" | colspan="14" |Current Share Price: £2.10 '''update latest''' |- !''£ million'' ! colspan="8" |''Historical'' ! colspan="5" |''Projected'' |- ! !2015 !2016 !2017 !2018 !2019 !2020 !2021 !2022 !2023 !2024 !2025 !2026 !2027 |- ! colspan="14" |Income Statement |- |Revenue |13725 |14955 |14747 |15729 |16587 |11491 |11218 |13520 |14430 |15338 |16269 |17625 |18690 |- |''% growth'' | |9.0% | -1.4% |6.7% |5.5% | -30.7% | -2.4% |20.5% |6.7% |6.3% |6.1% |8.3% |6.0% |- | | | | | | | | | | | | | | |- |Cost Of Goods Sold |10448 |11876 |12325 |14531 |15645 |11678 |9082 |10763 |11544 |12270 |12852 |13924 |14578 |- |''% of revenue'' |76% |79% |84% |92% |94% |102% |81% |80% |80.0% |80.0% |79.0% |79.0% |78.0% |- | | | | | | | | | | | | | | |- |Gross Profit |3277 |3079 |2422 |1198 |942 | -187 |2136 |2757 |2886 |3068 |3416 |3701 |4112 |- | | | | | | | | | | | | | | |- |Selling General & Admin Exp. |1038 |1765 |1117 |1572 |1105 |772 |893 |1079 |1240 |1318 |1383 |1463 |1495 |- |''% of revenue'' |7.6% |11.8% |7.6% |10.0% |6.7% |6.7% |8.0% |8.0% |8.6% |8.6% |8.5% |8.3% |8.0% |- | | | | | | | | | | | | | | |- |Depreciation & Amort. |512 |538 |524 |643 |589 |604 |531 |498 |534 |568 |602 |652 |692 |- |''% of revenue'' |3.7% |3.6% |3.6% |4.1% |3.6% |5.3% |4.7% |3.7% |3.7% |3.7% |3.7% |3.7% |3.7% |- | | | | | | | | | | | | | | |- |R & D Exp. |818 |923 |843 |768 |770 |723 |778 |891 |866 |920 |976 |1058 |1121 |- |% of revenue |6.0% |6.2% |5.7% |4.9% |4.6% |6.3% |6.9% |6.6% |6.0% |6.0% |6.0% |6.0% |6.0% |- | | | | | | | | | | | | | | |- |Total Operating Expenses |1846 |2688 |1960 |2340 |1875 |1495 |1671 |1970 |2106 |2239 |2359 |2520 |2617 |- | | | | | | | | | | | | | | |- |Operating Income/ EBIT |1431 |391 |462 | -1142 | -1522 | -2286 |465 |787 |780 |829 |1057 |1181 |1495 |- | | | | | | | | | | | | | | |- |EBITDA |1943 |929 |986 | -499 | -933 | -1682 |996 |1285 |1314 |1396 |1659 |1833 |2187 |- | | | | | | | | | | | | | | |- |Tax Expense |76 | -604 |515 | -554 |420 |302 | -418 | -308 |156 |166 |211 |236 |299 |- |''Effective tax rate'' |5% | -154% |111% |49% | -28% | -13% | -90% | -39% |20% |20% |20% |20% |20% |- | | | | | | | | | | | | | | |- |EBIAT |1355 |995 | -53 | -588 | -1942 | -2588 |883 |1095 |624 |663 |846 |945 |1196 |- | | | | | | | | | | | | | | |- ! colspan="14" |Cashflow |- |D&A |512 |538 |524 |643 |589 |604 |531 |498 |534 |568 |602 |652 |692 |- |''% of revenue'' |3.7% |3.6% |3.6% |4.1% |3.6% |5.3% |4.7% |3.7% |3.7% |3.7% |3.7% |3.7% |3.7% |- | | | | | | | | | | | | | | |- |Capital Expenditure | -487 | -585 | -730 | -905 | -747 | -585 | -328 | -359 | -721 | -767 | -895 | -969 | -1028 |- |''% of revenue'' |3.5% |3.9% |5.0% |5.8% |4.5% |5.1% |2.9% |2.7% |5.0% |5.0% |5.5% |5.5% |5.5% |- | | | | | | | | | | | | | | |- |Change in NWC |489 | -463 | -2910 | -344 | -107 |1119 |3323 | -1974 | -883 | -938 | -995 | -1078 | -1143 |- |% of revenue |3.6% | -3.1% | -19.7% | -2.2% | -0.6% |9.7% |29.6% | -14.6% | -6.1% | -6.1% | -6.1% | -6.1% | -6.1% |- | | | | | | | | | | | | | | |- |'''Unlevered FCF''' |891 |1411 |2651 | -506 | -1993 | -3688 | -2237 |3208 |'''1319''' |'''1402''' |'''1548''' |'''1706''' |'''2003''' |} ==== Notes regarding the values used in the forecasting ==== * All historical data, such as from the income statement and cashflow statement, was taken from Capital IQ, and cross-referenced with Yahoo Finance as well as Rolls-Royce investor presentations * Revenue projections were taken from Capital IQ, and cross-referenced with Yahoo Finance. ** Following the 2023 Half Year investor presentation by Rolls-Royce on Aug 3rd 2023, revenue projections have been updated, and these updated values have been used. * All other independent sections* of the income statement and cashflow statement (with some exceptions) were forecast by taking an average percentage of revenue over the historical period after 2015, and assumed to be constant over the forecast period. Data for 2020 and 2021 was excluded from the average to ignore the impact of COVID-19 on the industry (and on Rolls-Royce). The Cost Of Goods Sold forecast excluded 2018, 2019 and 2020 to highlight the assumption that the COGS should be a constant fraction of the revenue, and the years -18,-19,-20 had hiked Costs of Goods Sold relative to revenue generated. ** The exceptions include the SG&A expenses gradually decreasing from the average (8.6%) down to 8.0% by the end of the forecasting period, as well as COGS slowly reducing from the average (80%) down to 78% by 2027. Both reductions are following the company's aim to reduce energy and operating costs in line with the 2030 net zero target. This is complemented by a slightly higher than average (4.2%) capital expenditure, starting at 5.0% by the end of 2023 and growing to 5.5% by 2027, highlighting the company's investments into renewable energy as well as energy efficiency. Finally, R&D costs are at a steady 6.0% of the revenue, higher than the previous average of 5.7%, following continued research into their hybrid-electric solutions within the Power Systems segment, development of the more efficient UltraFan jet engine, testing of sustainable aviation fuels, small modular reactors (SMRs) and hybrid and fully electric propulsion. These products are expected to be compatible with net-zero requirements by 2030, and all other products will reach this status by 2050. Rolls-Royce expects future investment required to deliver these technology.<ref>https://www.rolls-royce.com/~/media/Files/R/Rolls-Royce/documents/investors/2022-full-year-results-press-release.pdf</ref> * The tax expense for the historical period was highly fluctuating and difficult to forecast in the same manner as other sections. Hence, a constant effective tax rate of 20% was applied throughout the forecast period, and used as the tax rate for the calculation of the WACC. <nowiki>*</nowiki>''independent sections refer to the group of sections that are required to fully characterise the income and cashflow statements. Explicitly, the independent sections are those for which the % revenue or effective rate has been calculated. For example, capital expenditure. EBITDA is not an independent section as it can be calculated from EBIT and D&A costs, the former of which is another dependent section.'' ==== Discount Rate Calculation ==== {| class="wikitable" !WACC ! !Notes |- |'''Weights''' | | |- |Total Debt |6079 | |- |Market Cap |17599 | |- |Total |23678 | |- |Wd |26% |Weight of debt calculated as the total debt as a proportion of total capital. |- |We |74% |Weight of equity calculated as the market cap as a proportion of total capital |- | | | |- |'''Debt''' | | |- |Total Debt |6079 |Cost of debt was calculated by taking interest expenses from the income statement and dividing this by the total debt making note of the fact that debt is a tax deductable item. |- |Interest Expense | -153 | |- |Rate |2.5% | |- |Effective Tax Rate |20% | |- |Rd(1-t) |2.0% | |- | | | |- |'''Equity''' | | |- |Risk Free Rate |4.05% |Capital asset pricing model was used to calculate the cost of equity. Risk free rate of the US Treasury 10 Year was used. |- |Beta |1.7 |Beta for the stock was found from Yahoo Finance |- |Market Rate |10% |Current market rate was calculated as the average returns of the S&P 500 over the past 50 years. |- |Re |14.2% | |- | | | |- |'''Discount Rate''' |11.0% |This is the value used for the WACC |- |'''Perpetuity Growth Rate''' |2.0% |A perpetuity growth rate of 2% was used as this is sufficiently low to ensure that the company is not projected to increase in size far faster than the global economy in the very long term. |} {| class="wikitable" |+Unlevered Cashflow Projection ! colspan="2" rowspan="2" |£ millions !2023 !2024 !2025 !2026 !2027 !Terminal Value (Perpetuity Growth) !Notes |- | rowspan="2" |1319 | rowspan="2" |1402 | rowspan="2" |1548 | rowspan="2" |1706 | rowspan="2" |2003 | rowspan="2" |22587 | rowspan="2" |The terminal value of the company was calculated using the Gordon Growth Model<ref>https://www.investopedia.com/terms/t/terminalvalue.asp</ref>. |- | colspan="2" |FCF |} {| class="wikitable" |+Cashflow Discounting for Valuation !Present Value of FCF |5763 |- !Terminal Value |22587 |- !Net Present Value of TV |13377 |- !Enterprise Value |19140 |- !Net Debt |1596 |- !Equity Value |17544 |- !Shares Out |8420 |- !'''Equity Value per Share''' |'''£2.08''' |- !'''Current share price''' |'''£2.10''' |- !''Difference'' | '''-1%''' |} === Sensitivity Analysis === A sensitivity analysis was also conducted to reflect how changes in the discount rate and perpetuity growth rate would affect the intrinsic value of the company. {| class="wikitable" ! colspan="2" rowspan="2" |£2.08 ! colspan="5" |Perpetuity Growth |- !1.0% !1.5% !2.0% !2.5% !3.0% |- ! rowspan="7" |WACC !9.5% |£2.32 |£2.44 |£2.58 |£2.74 |£2.92 |- !10.0% |£2.17 |£2.28 |£2.40 |£2.53 |£2.69 |- !10.5% |£2.04 |£2.13 |£2.24 |£2.36 |£2.49 |- !11.0% |£1.91 |£1.99 |'''£2.08''' |£2.18 |£2.30 |- !11.5% |£1.81 |£1.89 |£1.97 |£2.06 |£2.16 |- !12.0% |£1.72 |£1.78 |£1.85 |£1.93 |£2.02 |- !12.5% |£1.63 |£1.69 |£1.75 |£1.82 |£1.90 |} === Relative Valuation === Trading comparable analysis was used to compare Rolls Royce to its competitors in the market. A range of different multiples are used to evaluate if the current share price of Rolls Royce is fairly priced or under/overvalued. <ref>https://www.alphaspread.com/security/otc/rycey/relative-valuation</ref> {| class="wikitable" | !Market Cap !Price / Sales !Price/Earnings per Share !EV/EBITDA !EV/EBIT !'''PEG''' !'''Growth Adjusted P/S''' |- |'''Rolls-Royce''' |17.3B USD |1.3 | -13.6 |11.3 |25.7 | - |6.5 |- |'''Boeing Co''' |139B USD |1.9 | -31.2 | -115.5 | -50.9 | - |3.6 |- |'''Raytheon Technologies''' |123B USD |1.7 |22.1 |14.8 |24.9 |24.3 |6.5 |- |'''Airbus SE''' |103B EUR |1.8 |29.5 |14.9 |24.3 |46.1 |4.3 |- |'''Lockheed Martin''' |112B USD |1.7 |15.9 |12.6 |14.6 |53.0 |18.9 |- |'''Safran SA''' |62.1B EUR |3.2 | -25.2 |15.2 |22.9 | - |6.7 |- |'''Northrop Grumman''' |66.4B USD |1.8 |14.3 |15.4 |21 | -119.2 |10.0 |- |'''General Dynamics''' |61.2B USD |1.5 |18.2 |13.5 |16.4 |55.2 |7.5 |- |'''TransDigm Group''' |49.2B USD |8.3 |51.3 |23.3 |25.7 |37.4 |18.9 |- |'''BAE Systems''' |31.1B GBP |1.5 |19.5 |11.5 |15.5 |52.7 |5.2 |- |'''L3harris Technologies''' |35.3B USD |2 |44 |15.9 |24.9 |28.0 |12.5 |- | | | | | | | | |- |'''Median''' | |1.8 |18.2 |14.8 |22.9 |41.8 |6.7 |- |'''Mean''' | |2.4 |13.2 |3.0 |15.0 |22.2 |9.1 |- |'''Lower Quartile''' | |1.6 |0.4 |12.1 |16.0 |27.1 |5.8 |- |'''Upper Quartile''' | |2.0 |25.8 |15.3 |24.9 |52.8 |11.3 |- |'''Maximum''' | |8.3 |51.3 |23.3 |25.7 |55.2 |18.9 |- |'''Minimum''' | |1.3 | -31.2 | -115.5 | -50.9 | -119.2 |3.6 |} The valuation multiples are expressed in the bar charts with the industry median and the value of the respective multiple for Rolls Royce, highlighted using a dotted line. [[File:Final P-S.png|none|thumb|786x786px]] P/S – Price to Sales ratio evaluates how much an investor values each dollar of sale generated by the company. The average P/S ratio in the industry is 1.8 while the P/S ratio of Rolls Royce is 1.3. A low P/S ratio suggests that the investors are willing to pay a lower price per dollar of sale generated implying an undervaluation. The implied share price is GBX 291.05 whereas the trading share price as of 11/08/23 is GBX 207.90. <ref><nowiki>https://www.investopedia.com/terms/p/price-to-salesratio.asp</nowiki></ref> Revenue of £ 13.5 billion <ref>https://uk.sports.yahoo.com/news/rolls-royce-holdings-full-2022-071927733.html</ref>and 8.3 billion outstanding shares <ref>[https://www.macrotrends.net/stocks/charts/RYCEY/rolls-royce-holdings/shares-outstanding#:~:text=Rolls%2DRoyce%20Holdings%202022%20shares,a%2039.5%25%20increase%20from%202020. https://www.macrotrends.net/stocks/charts/RYCEY/rolls-royce-holdings/shares-outstanding#:~:text=Rolls%2DRoyce%20Holdings%202022%20shares,a%2039.5%25%20increase%20from%202020.]</ref> in 2022 were considered in order to obtain the implied share price from the median P/S multiple. [[File:Final PE.png|none|thumb|1042x1042px]] P/E – Price to Earnings ratio shows how much an investor is willing to pay per dollar of earnings generated. It portrays an investor’s expectation of the future earnings of the company. The average P/E ratio in the industry is 18.2 while the P/E ratio of Rolls Royce is -13.6. A low P/E ratio suggests that the investors are willing to pay a lower price per dollar of EPS generated implying an undervaluation. A negative P/E ratio results from the negative earnings per share. <ref><nowiki>https://www.investopedia.com/terms/p/price-earningsratio.asp</nowiki></ref> [[File:Final EV-EBITDA.png|none|thumb|1164x1164px]] EV/EBITDA – The ratio evaluates the enterprise value of the company (considering all debts and liabilities) with respect to the operating performance of the company. The average EV/EBITDA ratio in the industry is 14.8 while the EV/EBITDA ratio of Rolls Royce is 11.3. A low EV/EBITDA ratio suggests an undervaluation. <ref><nowiki>https://www.investopedia.com/terms/e/ev-ebitda.asp</nowiki></ref> [[File:Final EV-EBIT.png|none|thumb|1024x1024px]] EV/EBIT – The ratio evaluates the enterprise value of the company (considering all debts and liabilities) with respect to the operating earnings of the company. The average EV/EBITDA ratio in the industry is 22.9 while the EV/EBITDA ratio of Rolls Royce is 25.7. A high EV/EBITDA ratio implies an overvaluation. <ref><nowiki>https://www.investopedia.com/terms/e/ebit-ev-multiple.asp</nowiki></ref> [[File:Final Growth adjusted P-S.png|none|thumb|827x827px]] The growth adjusted P/S is the ratio of P/S to the growth in revenue. The growth adjusted P/S for Rolls Royce (6.5) is noticeably smaller than the industry median (6.7). The implied share price is GBX 215.59 while the share price as of 11/08/23 is GBX 207.90 implying an undervaluation.
Summary:
Please note that all contributions to Stockhub may be edited, altered, or removed by other contributors. If you do not want your writing to be edited mercilessly, then do not submit it here.
You are also promising us that you wrote this yourself, or copied it from a public domain or similar free resource (see
Stockhub:Copyrights
for details).
Do not submit copyrighted work without permission!
Cancel
Editing help
(opens in new window)