Rolls-Royce to Raise 2.5 Billion Pounds to Strengthen Balance Sheet as COVID-19 Hurt

Rolls-Royce Holding Plc, one of the world’s leading producers of aero engines for large civil aircraft and business jets, said that it was exploring options to raise up to 2.5 billion pounds ($3.2 billion) to enhance balance sheet resilience and strength.

The second-largest provider of defence aero engines globally said it was considering a variety of structures including new debt issuance, a rights issue and potentially other forms of equity issuance.

No final decisions have been taken as to whether or when to proceed with any of these options or as to the precise amount that may be raised, the company said.

Rolls-Royce’s shares closed 5.13% lower at GBX 180.15 on Friday; the stock is down over 70% so far this year.

Rolls-Royce stock forecast

Ten analysts forecast the average price in 12 months at GBX 295.71 with a high forecast of GBX 498.66 and a low forecast of GBX 80.92. The average price target represents a 64.15% increase from the last price of GBX 180.15. All those ten equity analysts, three rated “Buy”, four rated “Hold” and three rated “Sell”, according to Tipranks.

Morgan Stanley gave a target price of GBX 336 with a high of GBX 677 under a bull-case scenario and GBX 130 under the worst-case scenario. Berenberg raised the stock rating to “Buy” from “Hold” but lowered their target price forecast to GBX 270 from GBX 890.

Other equity analysts also recently updated their stock outlook. Credit Suisse cut their target price to GBX 200 from GBX 210; JP Morgan cuts the target price to GBX 80 from GBX 90; Jefferies cuts price target to GBX 500 from GBX 700; Citigroup cuts price target to GBX 564 from GBX 960 and UBS cuts target price to GBX 265 from GBX 328.

Analyst views

“Rolls-Royce has underperformed the peer group YTD and appears to trade on a single-digit P/E multiple in 2022 – much lower than major peers. There are fundamental reasons for this: high exposure to long-haul traffic and high operating leverage mean there is greater earnings and cash flow volatility in the near term,” said Andrew Humphrey, equity analyst at Morgan Stanley.

“Cash outflows of £4 billion in 2020 and around £500 million in 2021 will lead to higher leverage, and we, therefore, believe Rolls-Royce will need to address balance sheet structure to regain an investment-grade credit rating,” Humphrey added.

Upside and Downside Risks

Upside: 1) Faster recovery in widebody traffic. 2) Trent 1000 in-service issues have been demonstrably resolved. 3) Cash targets are met and cash flow quality improved. 4) Additional orders restore the market’s confidence in widebody prospects, highlighted by Morgan Stanley.

Downside: 1) Accelerated retirements of mid-life Trent-powered widebody aircraft. 2) Further cost overruns on Trent 1000. 3) Change to mid-term cash guidance.