Tufan Erginbilgiç, chief executive of Rolls-Royce, was outdoing himself when he said a year ago that the engine maker had the potential to become the most valuable company on the London Stock Exchange.
Yes, everyone knows about the remarkable transformation. Rolls was a corporate disaster during the Covid shutdown of global aviation, then the share price increased tenfold under Erginbilgiç. But it still takes a leap of imagination to think the firm could one day challenge for the top of the major capitalization charts.
And it still needs work. Today’s £120bn valuation puts Rolls in fourth place on Footsy, almost alongside miner Rio Tinto, but there is still a big gap to Shell (£185bn), AstraZeneca (£198bn) and HSBC (£274bn), none of which are still standing.
Erginbilgiç’s long-term boom, however, looks less spectacular with each set of results. Thursday’s half-year numbers came with the usual upgrade to financial forecasts. Full-year cash flow will be £200m better than previously forecast at £3.8bn-£4bn. For operating profit, the increase was £700m to £4.7bn-£4.9bn. These upgrades show that there is still mileage in Erginbilgiç’s efforts to invest in the reliability of the engines to allow for the renegotiation of contracts with airlines.
Long-term growth projections, however, depend on many other things — beyond wide-body-aircraft engines — going well. Defense naturally seems like a safe bet. The prime minister’s appearance at Barrow-in-Furness on Thursday served as a reminder that Rolls builds nuclear propulsion systems for Britain’s submarines. The rest of the country’s defense investment plan, whatever the wrangling over the exact budget, is also unambiguously good news for Rolls. There are possibilities in propulsion systems for unmanned aircraft and more.
The division that is suddenly getting the most attention, though, is the power system. It was seen as a maker of boring old-tech diesel systems for naval ships and military tanks. But AI data centers in the US also want equipment. And they also want Rolls’ gas-fired turbines for primary power as they struggle to connect to the low-cost U.S. power grid. Rolls’ order book for power generation was up 55% in the half.
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It also looks like Rolls will have spillover AI benefits for small modular reactors (SMRs). At 470 megawatts, SMRs were originally intended only as a low-carbon power source for the national grid, but some hyperscale data center projects in the US are so large and power-hungry that they have become potential customers. This gives Rolls a foothold in several AI power camps: Diesel for backup; gas for primary power; and SMRs when they arrive in 2030.
More likely, Rolls intends to re-enter the market for narrow-body aircraft engines. It’s a slow story because Airbus and Boeing have yet to formally commit to new single-oil models. Nor is there any guarantee that Rolls will win competition from those seeking a position as an engine supplier.
But the potential market is huge – many times the size of widebody – which is why Rolls’ requests for financial support from the UK Treasury will almost certainly be approved, never mind the corporate welfare for a company missing out on cash-for-cash buybacks. Indeed, subsidies are a fact of life in the international aerospace business, a point that will certainly not be lost on the re-industrialising prime minister. Think of the potential for 40,000 jobs in UK advanced manufacturing, runs the corporate pitch.
If it all comes together, then, yes, Erginbilgiç’s guesses about Rolls’ potential aren’t as wild as they seem. The company is positioned squarely at the center of “major global trends,” as he puts it: defense, AI and the transition to energy through nuclear. One of these days, something would go wrong, as it regularly did at the Rolls for nearly two decades. But it is impossible to name another great UK company with vast opportunities on various fronts.
In retrospect, the Treasury missed a trick in 2020.
