Rolls-Royce Holdings plc

Summary

Rolls-Royce Holdings plc operates as an industrial technology company in the United Kingdom and internationally. The company operates in four segments: Civil Aerospace, Power Systems, Defence, and New Markets. The Civil Aerospace segment develops, manufactures, and sells aero engines for large commercial aircraft, regional jet, and business aviation markets, as well as provides aftermarket services. The Power Systems segment engages in the development, manufacture, marketing, and sale of integrated solutions for onsite power and propulsion for the marine, defense, power generation, and industrial markets. The Defence segment offers aero engines for military transport and patrol aircraft applications; and naval engines and submarine nuclear power plants, as well as aftermarket services. The New Markets segment develops, manufactures, and sells small modular reactor and new electrical power solutions. It also provides maintenance, repair, and overhaul services. Rolls-Royce Holdings plc was founded in 1884 and is headquartered in London, the United Kingdom.

Segments

Rolls-Royce Holdings plc operates as an industrial technology company in the United Kingdom and internationally. The company operates in four segments: Civil Aerospace, Power Systems, Defence, and New Markets.

New Markets

The Rolls-Royce New markets segments consists of 2 early stage businesses with high growth potential: Rolls-Royce Electrical and Rolls-Royce SMR.

Rolls-Royce Electrical

Electrification will contribute to decarbonisation of aviation and electrical technologies and capabilities can also be leveraged for civil, defence and marine applications. Smaller, all-electric aircraft will enable more efficient, quieter and zero-emission air mobility, while hybrid-electric systems increase range and enable more sustainable solutions for larger regional aircraft. The emerging market of advanced air mobility, which includes electrical vertical take-off (eVTOL) aircraft as well more conventional electric commuter aircraft, is aiming to enable a new way of using air mobility on urban and regional routes.

RR are championing aircraft electrification to deliver the clean, sustainable, safe, and silent propulsion and energy systems for the urban and regional air mobility markets of tomorrow.

RR develop complete power and propulsion systems for all-electric and hybrid-electric applications. Our systems under design feature the latest technology, from power generation and energy storage via power electronics and control systems to electric motors.

Electric propulsion unit for Urban Air Mobility

Electric propulsion unit for Urban Air Mobility

• Direct-drive, air-cooled 150 kW electric motor with integrated power electronics and control
• High external load capability with vertical, horizontal and tilting installation possible
• Torque to weight ratio of up to 28 Nm/kg thanks to integrated design, advanced thermal management and innovative topology
• Modular design & adaptive interface with integrated propeller bearing system
• High integrity design with using dual-lane concept

Electric propulsion unit for Regional Air Mobility

Electric propulsion unit for Regional Air Mobility

• Direct-drive, air-cooled 320 kW electric motor with integrated power electronics and control
• Power dense, compact modular & adaptable design for single, twin and quad engine aircraft platforms
• Patented multi-lane system architecture to meet highest safety standards for CS-23 applications

Energy Storage System

Energy Storage System

• Modular lithium-ion battery system for scalable configuration based on application demand
• Combination of 2-10 modules for system with 60 to 300 kWh capacity and 520 to 860 V nominal voltage
• Designed to meet highest safety levels
• State-of-the art cells with integrated aerospace battery management system packaged for safety and minimal weight
• Advanced thermal design enabling high performance, safety and cycle life

Turbogenerator system

Turbogenerator system

• High efficiency, dual-fuel capable turbogenerator system for hybrid-electric aircraft platforms
• 600 kW to > 1 MW scalable power output adaptable platform requirement
• Highly integrated design with power to weight ration <= 4 kW/kg
• SAF capable, provision for H2

Rolls-Royce Small Modular Reactors (SMR)

CAD visualisation of a SMR site

Rolls-Royce SMR Ltd is a factory built nuclear power plant that offers clean, affordable energy for all.

With an unprecedented demand for clean energy as global markets seek solutions to support their journey to net zero. The demand is for energy that is always on and which generates virtually no emissions. Nuclear energy is the most powerful source of ‘always on’ clean energy, however, it must be deliverable, scalable and cost competitive for it to be widely embraced.

Rolls-Royce's nuclear experience is complemented by their unique aerospace know-how of manufacturing, supply chain management and logistics. Together, that heritage and experience is at the core of the SMR program.

Rolls-Royce expects SMR to receive government approval by 2024 and expected to be fully integrated into the grid by 2030.

The Rolls-Royce SMR has the following benefits:

• Low cost

A highly competitive source of ‘always on’ clean energy, meeting global challenges in an affordable and investable way. Rolls-Royce SMR is a low-cost clean energy solution, using proven and commercially available technology to deliver a fully integrated, factory built nuclear power plant.

• Deliverable

Rolls Royce SMR will use the breadth of the UK supply chain, which is able to contribute more than 80% of each SMR by value – focusing on standardised, commercially available and off-the-shelf components. Approximately 90% of manufacturing and assembly activities are carried out in factory conditions, helping to maintain an extremely high-quality product - reducing on-site disruption and supporting international roll out.

• Global and Scalable

The need for clean energy has created a global demand for SMR as countries look for ways to provide reliable ways to achieve net zero.

The factory-built model is entirely scalable. Rolls-Royce SMR will support international efforts to decarbonise energy systems, with a forecast to target £250bn of exports. Memorandums of Understanding are already in place with Estonia, Turkey and the Czech Republic. The Rolls-Royce SMR programme is forecast to create 40,000 regional UK jobs by 2050 and generate £52bn in economic benefit.

The compact footprint increases site flexibility and maximises potential plant locations, including replacement for existing coal or gas-fired plants. It will occupy approximately one tenth of the size of a conventional nuclear generation site, helping to reduce local environmental impacts.

• Investable

By design, SMR is focused on attracting all forms of private capital to support the build out of global SMR demand. With a proven factory built commoditised approach, our SMR will offer investors and lenders a degree of confidence that will enable future customers to access a range of capital options to finance their SMR purchase.

For nuclear energy to play a meaningful and more significant role in net zero ambitions, it must be financeable without the need for Government intervention in the long term. A Rolls-Royce SMR power station will have the capacity to generate 470MW of low carbon energy, equivalent to more than 150 onshore wind turbines. It will provide consistent baseload generation for at least 60 years, helping to support the roll-out of renewable generation.

Projects

Rolls Royce have a plethora of fascinating projects underway at the moment- we have selected a few to highlight the innovative and adaptive nature of the company.

Space:

This is an image of the nuclear power reactor Rolls Royce are testing and hoping to power future missions to Mars/the Moon.

Rolls Royce is working on a two-stage-to-orbit system eg. gas turbines to power hypersonic planes that will take payloads to low Earth orbit, as well as nuclear thermal propulsion* solutions to power fast, efficient rockets for space travel. The gas turbines will take the aircraft into low Earth orbit by combining propulsion systems with a gas turbine and ramjet technologies*.

They are also working on producing small reactors (micro reactors) which will use clean, nuclear energy to power the bases that will be set up on the moon. A regular rocket would require tonnes of fuel to reach the demands of Moon/Mars inhabitants however Rolls Royce’s nuclear reactors only use a few grams of uranium so the systems are lighter and can carry a higher payload whilst maintaining clean energy standards. The reactors will also have an extremely long product life-span as it relies on the natural decay of Uranium which takes decades.

Rolls Royce is undertaking this project since the current goal for space exploration is to inhabit the Moon/ Mars by 2030. Rolls Royce are currently in their product development and testing phase with this project which are showing promising results. This project is funded by the UK Space Agency

*  Nuclear propulsion: A force which provides propellant efficiency in rockets

* Ramjet technology: A type of air breathing jet engine which uses the engine’s forward motion to compress incoming air

Small Molecular Reactors (SMR):

This is an image of the factory which will generate 470 MW of nuclear, low carbon, clean and sustainable energy to almost 1 million homes in the UK.

In light of the Russia-Ukraine war the UK government has increased investments into the UK energy sector, especially clean energy with the aim of reducing energy dependency on other countries. Rolls Royce are attempting to distribute nuclear reactors which provide scalable, cost competitive and widely available nuclear energy.

Rolls Royce SMR have produced a repeatable factory-built power station which has been tested for its usage of nuclear power. The factory’s reproducible status has allowed Rolls Royce to hopefully have the same factory design internationally in Estonia, Turkey and the Czech Republic. The project is predicted to generate £52 billion in economic benefit and 40,000 regional UK jobs by 2050.

The SMR will generate roughly 470 MW of low carbon energy which is equivalent to more than 150 onshore wind turbines. It will provide consistent base load generation for at least 60 years, unlike wind turbines which have an average lifespan of ~ 20 years. The power station will be able to support both on-grid electricity and a range of off-grid clean energy solutions on top of providing clean energy for ~ 1 million homes.

Hydrogen Engines:

This is an image depicting the hydrogen fuel cells which will hopefully be used in air travel to reduce CO2 emissions, noise pollution and costs of aircraft construction.

Rolls Royce is also releasing a brand new hydrogen engine programme. They will be carrying out a series of rig and engine tests which validate the efficiency of hydrogen engines for small-mid sized aircrafts. If this programme is successful the firm will move to phase II- the flight test phase. The programme began in 2022 with testing on the Rolls-Royce AE 2100 engine in the UK with a followup with the Rolls-Royce Pearl 15 jet engine with an indefinite date. This project was inspired by market research carried out at UK Aerospace Technology Institute’s Fly Zero team which emphasised the market value of hydrogen engines in aircraft.

Urban Air Mobility:

Urban air mobility represents a revolutionary market which has not yet been commercialised but is in its growth stage. The market is predicted to be worth over one billion pounds by the mid 2020s (hopefully 2027). The products are air taxis and electric, plane like vehicles which can transport up to four people at a time. The aim of these vehicles is to cover distances in a shorter amount of time, in a clear and more cost effective manner- the propulsion systems put in place by Rolls Royce will help meet these standards.

This is an image of what the urban air mobility vehicles will look like.

The electric propulsion unit for urban air mobility will be the direct-drive, air cooled 320 kW electric motor. The Torque* to weight ratio of up to 28 Nm/kg because of the engines integrated design and thermal management. This makes the engine highly adaptive and reliable. The energy storage system has been designed for utmost safety- it is composed of a lithium-ion battery with 2-10 module modules with 60-300 kWh capacity and 520-860V nominal voltage.

Although there is a lot of competition amongst large firms like Rolls Royce and also smaller start-ups, when Rolls Royce’s profound history in the aerospace industry is taken into consideration they are much more inclined to deliver more reliable, scalable and safe vehicles.

*Torque is the amount of force required to cause an object to rotate on the axis

Competitor Analysis

Competing Company	Description	Company Logo
SpaceX: SpaceX is a private company whose mission is to produce the most powerful next generation of fully reusable launch vehicles which will be capable of carrying humans to Mars and hopefully other destinations in the solar system.	The company believes that reusability is key to making space more accessible. SpaceX produce spacecraft which are engineered to, their core product- Starship, is a fully reusable transportation system which can carry up to 150 metric tonnes. The vehicle will be supported by a tanker which will refill the aircraft in the low-Earth orbit prior to the Mars departure The vehicle’s raptor engine functions on a methane-oxygen combustion engine and has 230 tf of force.   This means the primary cost is oxygen and methane which are extremely cheap.
Joby Aviation: Joby Aviation is a company determined to pioneer the next big thing- Air mobility vehicles. The futuristic aircraft takes off and lands vertically while carrying up to four passengers.	The ridesharing service will be powered by six engines It will be a green alternative to driving and will also be a significantly faster than current transportation vehicles They have a partnership with Uber, so their vehicle will hopefully be the next Uber taxi. The company boasts about their “no noise” vehicle Partnerships with Uber, Toyota and Nasa put the company in quite a strong position
NuScale Power: A company which  has 48 small modular nuclear reactor plants around the US with  significant interest from the United Kingdom, Europe, the Middle East, Africa, and Asia.	They are the first and only small modular reactor (SMR) to receive design approval from the U.S. Nuclear Regulatory Commission (NRC). Their core product- VOYGR produces 924 MWe of energy in 0.05 square miles in comparison to wind which takes up 17 square miles The locations of the plants are set on retired coal mining sites The company’s plants are supposedly smaller and simpler and hence eliminate the complexities of traditional plants. VOYAGERs are the smallest light water SMR and are powered by a 77 MWe NuScale Power Module The design life currently exists at 60 years
Airbus: The company is an aircraft manufacturer focused on increasing the volume of hydrogen-powered flights.	Airbus is maturing two hydrogen-based propulsion technologies in parallel. The project they’re undertaking- HyPERION, aims to reuse equipment designed for space applications as it follows a conditioning system as liquid hydrogen has to be stored at a -253°C. The company released its hydrogen fuel cell engine concept recently and since then has been conducting so far successful tests They want to produce their hydrogen powered plane by ~2035 Their cells create no CO2 or NOx emissions during operations – only heat and pure water The company sees the potential in hydrogen fuel cells as Hydrogen has a specific energy-per-unit mass that is three times higher than traditional jet fuel.	Error creating thumbnail: File with dimensions greater than 12.5 MP

Financials

5-year historical financials

Income Statement	FY-22	FY-21	FY-20	FY-19	FY-18
Revenue unit	13520	11218	11491	16587	15729
Gross Profit	2757	2136	1113	942	1198
EBITDA	1285	996	222	-344	-499
Operating Income	787	465	-382	-933	-1142
Net Income	-1269	120	-3170	-1315	-2401

Balance sheet	FY-22	FY-21	FY-20	FY-19	FY-18
Total asset (£m)	29450	28674	29517	32266	31857
Total liabilities (£m)	35466	33310	34392	35620	32909
Net assets (£m)	-6016	-4636	-4875	-3354	-1052

5-year forecasted financials

Income Statement	FY-23	FY-24	FY-25	FY-26	FY-27
Revenue unit	13790	14894	15787	17050	17391
Gross Profit	2758	2979	3157	3410	3478
EBITDA	1302	1407	1491	1610	1642
Operating Income	792	855	907	979	999
Net Income

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 positive 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 1%, then the company can be considered, within fair margins, as fair-valued.

What are the assumptions used to estimate the return?

Key Inputs

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

Current Share Price: £2.10 update latest
£ million	Historical								Projected
	2015	2016	2017	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
Income Statement
Revenue	13725	14955	14747	15729	16587	11491	11218	13520	14430	15338	16269	17625	18690
% growth		9%	-1%	7%	5%	-31%	-2%	21%	7%	6%	6%	8%	6%
Cost Of Goods Sold	10448	11876	12325	14531	15645	10378	9082	10763	11544	12270	13015	14100	14952
% of revenue	76%	79%	84%	92%	94%	90%	81%	80%	80%	80%	80%	80%	80%
Gross Profit	3277	3079	2422	1198	942	1113	2136	2757	2886	3068	3254	3525	3738
Selling General & Admin Exp.	1038	1765	1117	1572	1105	772	893	1079	1240	1318	1398	1515	1607
% of revenue	8%	12%	8%	10%	7%	7%	8%	8%	9%	9%	9%	9%	9%
Depreciation & Amort.	512	538	524	643	589	604	531	498	534	568	602	652	692
% of revenue	4%	4%	4%	4%	4%	5%	5%	4%	4%	4%	4%	4%	4%
R & D Exp.	818	923	843	768	770	723	778	891	817	868	921	998	1058
% of revenue	6%	6%	6%	5%	5%	6%	7%	7%	6%	6%	6%	6%	6%
Total Operating Expenses	1846	2688	1960	2340	1875	1495	1671	1970	2057	2187	2319	2513	2665
Operating Income/ EBIT	1431	391	462	-1142	-933	-382	465	787	829	881	934	1012	1073
EBITDA	1943	929	986	-499	-344	222	996	1285	1363	1448	1536	1665	1765
Tax Expense	76	-604	515	-554	420	302	-418	-308	157	175	186	195	211
Effective tax rate	5%	-154%	111%	49%	-45%	-79%	-90%	-39%	20%	20%	20%	20%	20%
EBIAT	1355	995	-53	-588	-1353	-684	883	1095	663	705	747	810	859
Cashflow
D&A	512	538	524	643	589	604	531	498	534	568	602	652	692
% of revenue	4%	4%	4%	4%	4%	5%	5%	4%	4%	4%	4%	4%	4%
Capital Expenditure	-487	-585	-730	-905	-747	-585	-328	-359	-609	-647	-687	-744	-789
% of revenue	4%	4%	5%	6%	5%	5%	3%	3%	4%	4%	4%	4%	4%
Change in NWC	489	-463	-2910	-344	-107	1119	3323	-1974	-883	-938	-995	-1078	-1143
% of revenue	4%	-3%	-20%	-2%	-1%	10%	30%	-15%	-6%	-6%	-6%	-6%	-6%
Unlevered FCF	891	1411	2651	-506	-1404	-1784	-2237	3208	1471	1563	1658	1796	1905

WACC		Notes
Weights
Total Debt	6079
Market Cap	15651
Total	21730
Wd	28%	Weight of debt calculated as the total debt as a proportion of total capital.
We	72%	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	10.8%
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.

DCF		2023	2024	2025	2026	2027	Terminal Value (Perpetuity Growth)	Notes
£ million
FCF		1471	1563	1658	1796	1905	22164	The terminal value of the company was calculated using the Gordon Growth Model.
PV of FCF	6157
Terminal Value	22164
NPV of TV	13293
Enterprise Value	19451
Net Debt	1596
Equity Value	17855
Shares Out	8420
Equity Value per Share	2.12
Current share price	2.10 update
Difference	1% update

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.

£2.12		Perpetuity Growth
		1.0%	1.5%	2.0%	2.5%	3.0%
WACC	9.5%	£2.27	£2.39	£2.52	£2.67	£2.84
	10.0%	£2.13	£2.23	£2.35	£2.48	£2.62
	10.5%	£2.01	£2.10	£2.19	£2.31	£2.43
	10.8%	£1.94	£2.03	£2.12	£2.22	£2.34
	11.0%	£1.89	£1.97	£2.06	£2.16	£2.27
	11.5%	£1.79	£1.86	£1.94	£2.02	£2.12
	12.0%	£1.70	£1.76	£1.83	£1.90	£1.99