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Rolls-Royce Holdings plc
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=== Discounted Cash Flow Model === {| class="wikitable" | colspan="14" |Current Share Price: Β£2.10 '''update latest''' |- !''Β£ 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" |Β£ 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''' |'''Β£2.08''' |- !'''Current share price''' |'''Β£2.10''' |- !''Difference'' | '''-1%''' |}
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