Rolls-Royce Stock: Set to Reach New Highs in the Future, Buying Starts (OTCMKTS:RYCEY)

Reese The investment thesis remains compelling – thanks to its successful reversal

In this article we will talk about Rolls-Royce Holdings (OTCPK:RYCEY) (OTCPK:RYCEF), a unique company, since it is synonymous with luxury vehicles usually intended for… Extremely rich.

However, those in the know will be aware that this particular company no longer makes cars, as this division was previously created under the name Rolls-Royce Motors in 1973 and the rights to the brand were split between the BMW Group (OTCPK:BMWYY) and the Rolls Royce Group. Volkswagen Group (OTCPK:VWAGY) for Bentley Group.

RYCEY REVENUE SECTOR

Currently, RYCEY’s core business is actually in civil aviation, defense and energy systems, with civil aviation being the top/net driver at £7.34bn (+29% y/y) and £850m (+497% y/y) annual basis) in fiscal year 2023, respectively.

However, readers should note that things were not always this way It’s been smooth sailing over the past few years, thanks to the impact of COVID-19 on the aviation industry.

For context, RYCEY has faced uncertain cash flow issues during the pandemic that were attributed to its “power by the hour” business model, where aircraft owners only pay for the hours the aircraft engines have been used, essentially: an “engine subscription plan.” “

With most planes not flying during the peak of the pandemic, it was not surprising that RYCEY would experience impacted up/down earnings in FY2020/FY2021, with management having to take on additional debt at that time.

This was also when RYCEY had to raise capital by offering a “rights issue scheme” to shareholders in October 2022, whereby “investors can buy 10 new shares for every three they own at a price of 32p per share, a 41% discount on the theoretical price.” the previous”. -rights price,” effectively raising £2 billion in cash.

While this strategy has naturally eliminated “any liquidity questions during the crisis,” we have also seen its outstanding shares grow significantly from 1.9 billion in FY19 to 5.98 billion in FY2020, and 8.35 billion in FY2021, And finally to 8.4 billion in fiscal year 2020. Fiscal year 2023.

RYCEY 18Y stock price

As a result of the affected top/bottom lines and significantly increased dilutive capital during the pandemic period, it is not surprising that RYCEY share prices also collapsed between 2020 and 2022, with things only recovering by late 2022 following a management change and airing. Travel returns.

RYCEY 2027 target

The new CEO took radical steps at the time, by laying off several employees, optimizing operational costs, and increasing service prices, all of which were part of a turnaround plan to achieve the ambitious 2027 goals as outlined above.

Global air travel trends and forecasts

Meanwhile, global air travel recovered near pre-pandemic averages by the end of 2023, with things to grow even larger over the next few years as “the global commercial aviation fleet also expands by +33% to over 36,000 aircraft.” By 2033, According to analysis by Oliver Wyman“.

As a result of these developments, it is not surprising that RYCEY stock has recovered significantly +607.8% from the October 2022 low, well outperforming the broader market.

This is also supported by the company’s excellent FY2023 results, with revenue reaching £15.4bn (+21% YoY), and an increasing operating margin of 10.3% (+5.2 points YoY/+5.1 from FY19 margin of 5.2% ) and strong free cash flow. Generating £1.28bn (+154.4% y/y), also supported by growth in the incremental LTA balance to £9.08b (+23.2% y/y/+59.5% from FY19 levels of £5.69b). ).

Based on RYCEY’s growing cash/equivalents of GBP3.78b (+45.3% y/y) and moderate debt of GBP4.04b (-1.4% y/y) in FY2023, its balance sheet looks much healthier at net Debt is also -£0.26b (+82.6% y/y/-123.4% compared to FY19 net cash of £1.11b).

This is particularly because only £0.5bn of its debt is due in 2024, £0.8bn in 2025, and £2.8bn until 2028.

At the same time, readers should note that RYCEY’s management has provided promising guidance for FY2024, with operating profits of £1.85bn (+16.3% y/y) and £1.8bn in free cash flow generation (+40.6% y/y). annual basis), further confirming its successful turnaround story.

Future Consensus Estimates (in GBP)

Perhaps this is also why the consensus raised their future estimates, with RYCEY expected to deliver a promising top/bottom performance with a CAGR of +8.3%/+14.8% until FY2026.

This compares to previous estimates of +5.6%/-5.9% and historical growth of +3.9%/-19.3% between FY16 and FY19, respectively, with FY2024 potentially cementing the CEO’s position as a visionary leader. The company brought the company “from the platform blazed into a thriving platform” in just two short years.

At the same time, based on adjusted split prices, RYCEY stock has already surpassed the pandemic prices of the second quarter of 2020 (before the dilutive capital increase), further underscoring the excellent upside support and its continued reversal, thanks to the new CEO’s turnaround plans. .

So, is RYCEY stock a buy?Sell, sell, or hold?

Reese Reviews

Currently, RYCEY is trading at FWD P/E valuations of 27.64x, which is above its 1-year average of 25.67x although it is finally approaching its pre-pandemic 3-year average of 31.56x.

Compared to its aerospace peers, such as RTX Corporation (RTX) at 19.55x and GE Aerospace (GE) at 39.80x, RYCEY appears to still be trading reasonably well, offering interested investors a decent margin of safety.

Currently, based on fiscal 2023 adjusted EPS of $0.18 (based on exchange rates at the time of writing) and FWD valuations of 27.64x, RYCEY appears to be trading close to our fair value estimate of $5.00 .

Based on the consensus FY2026 adjusted EPS estimate of $0.27, there appears to be excellent upside potential of +39.4% for our long-term price target of $7.50 as well.

At the same time, based on RYCEY’s improved balance sheet and expanding profitability as discussed above, there is a good chance that management will reinstate dividends and/or buy back shares in the medium term, once it returns to an “investment grade credit rating.” “, presumably by sometime in 2025 as Fitch Ratings forecasts.

As a result of the attractive risk-reward ratio, we have initiated a Buy rating on RYCEY stock, although there is no specific entry point as this depends on individual investors’ dollar cost averaging and risk appetite.

Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. exchange. Please be aware of the risks associated with these stocks.