Author Topic: RR - Rolls-Royce  (Read 69866 times)

muscleman

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Re: RR - Rolls-Royce
« Reply #10 on: July 29, 2015, 03:07:53 PM »
Interesting writeup on seeking alpha
http://seekingalpha.com/article/3311125-rolls-royce-recent-dip-is-an-opportunity-long-term-outlook-remains-intact

It is really hard to understand the profitability here.
http://www.rolls-royce.com/news/press-releases/yr-2015/pr-29-07-2015-rr-signs-580m-totalcare-engine-support-agreement-with-vietname-airlines.aspx

340M Pounds for 14 engines. That's 24 M per engine. Assuming a 20% profit margin, it will be 4.8 M per engine profit. How long is this total care contract? 10 years? 20 years? That can change the valuation drastically. Does anyone know?

Assuming it is 10 years contract. Each year it will make 0.48 Million pounds per engine. There are 1500 engines sold. So that's 740 Million pounds per year profit. Giving it a 10 PE, and we get 7.4 Bn valuation. Today's market cap is 13 bn.

Is my assumption reasonable? Of course they have other lines of businesses, but not that profitable. It puzzle me as to why the author claims it is way undervalued.

I asked the article's author about totalcare revenue recognition today, he wrote:
"The company does not provide much detail on how revenue is recognized from TotalCare agreements. Given that, it is hard to give you an answer."

On the subject of pricing, he goes more into it in his previous article:
http://seekingalpha.com/article/3266845-rolls-royce-the-goose-has-laid-the-golden-engine

If it is hard to give the answer, then why can he comfortably claim RR is undervalued? Isn't totalCare contracts the major reason to invest in this annuity like business?


Arden

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Re: RR - Rolls-Royce
« Reply #11 on: July 29, 2015, 10:49:19 PM »
Interesting writeup on seeking alpha
http://seekingalpha.com/article/3311125-rolls-royce-recent-dip-is-an-opportunity-long-term-outlook-remains-intact

It is really hard to understand the profitability here.
http://www.rolls-royce.com/news/press-releases/yr-2015/pr-29-07-2015-rr-signs-580m-totalcare-engine-support-agreement-with-vietname-airlines.aspx

340M Pounds for 14 engines. That's 24 M per engine. Assuming a 20% profit margin, it will be 4.8 M per engine profit. How long is this total care contract? 10 years? 20 years? That can change the valuation drastically. Does anyone know?

Assuming it is 10 years contract. Each year it will make 0.48 Million pounds per engine. There are 1500 engines sold. So that's 740 Million pounds per year profit. Giving it a 10 PE, and we get 7.4 Bn valuation. Today's market cap is 13 bn.

Is my assumption reasonable? Of course they have other lines of businesses, but not that profitable. It puzzle me as to why the author claims it is way undervalued.

I asked the article's author about totalcare revenue recognition today, he wrote:
"The company does not provide much detail on how revenue is recognized from TotalCare agreements. Given that, it is hard to give you an answer."

On the subject of pricing, he goes more into it in his previous article:
http://seekingalpha.com/article/3266845-rolls-royce-the-goose-has-laid-the-golden-engine

If it is hard to give the answer, then why can he comfortably claim RR is undervalued? Isn't totalCare contracts the major reason to invest in this annuity like business?


I think this presentation regarding TotalCare accounting answers your questions, I'm surprised the author hasn't referred me to it:
http://www.rolls-royce.com/~/media/Files/R/Rolls-Royce/documents/investors/results/presentations-and-briefings/2014-investor-briefing-totalcare-accounting-mark-morris-tcm92-57736.pdf

Sol Arden

kirkomi

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Re: RR - Rolls-Royce
« Reply #12 on: July 30, 2015, 06:59:22 AM »
340M Pounds for 14 engines. That's 24 M per engine. Assuming a 20% profit margin, it will be 4.8 M per engine profit. How long is this total care contract? 10 years? 20 years? That can change the valuation drastically. Does anyone know?

Assuming it is 10 years contract. Each year it will make 0.48 Million pounds per engine. There are 1500 engines sold. So that's 740 Million pounds per year profit. Giving it a 10 PE, and we get 7.4 Bn valuation. Today's market cap is 13 bn.

Are you not ignoring the engine business itself. The profits from selling more engines and long term contracts on those ?

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muscleman

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Re: RR - Rolls-Royce
« Reply #13 on: July 30, 2015, 08:13:17 AM »
340M Pounds for 14 engines. That's 24 M per engine. Assuming a 20% profit margin, it will be 4.8 M per engine profit. How long is this total care contract? 10 years? 20 years? That can change the valuation drastically. Does anyone know?

Assuming it is 10 years contract. Each year it will make 0.48 Million pounds per engine. There are 1500 engines sold. So that's 740 Million pounds per year profit. Giving it a 10 PE, and we get 7.4 Bn valuation. Today's market cap is 13 bn.

Are you not ignoring the engine business itself. The profits from selling more engines and long term contracts on those ?

Regards

The whole point of this total care business is to sell engines at breakeven/loss in order to get longer term annuity like profits from engine maintenance.
The SA author just replied to me and said the totalcare contracts are usually as long as the engine's life span, which means 20-50 years, not the 10 year assumption in my previous calculation. Therefore assuming 20 years and 1500 Trent 700 engines, the net income per year is only 340 million, so that's just a 3.4 bn worth business.

If you think 1500 engines are too small and they will quickly succeed and sell many more, please let me know your estimate on the Trent 700 engine counts in 3 years. Do you think that can become 6000? Even if so, that's just worth 3.4*4 = 13.6 bn, exactly today's market cap.

muscleman

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Re: RR - Rolls-Royce
« Reply #14 on: July 30, 2015, 08:31:27 AM »
I digged a bit deeper into the previous years' financial statements between 2009 and 2014, when the old CEO running the totalCare business liked a lot by Sequoia was still there and I thought they would have been gushing tons of free cash flows each year.
However, what I saw was this:
1. Every single year's depreciation+amortization cost is much less (about 50% less) than the "addition of intangible assets" + "addition of PPE" in its consolidated cash flow statement.
2. Each year's FCF, which I defined as OCF minus ("addition of intangible assets" + "addition of PPE"), is only about half that of the OCF, and the amount is around 0.3-0.5 bn per year. Very small amount indeed.

Given that, I would not figure out why it is even worth today's 13 bn market cap.

portfolio14

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Re: RR - Rolls-Royce
« Reply #15 on: July 30, 2015, 08:05:31 PM »
I digged a bit deeper into the previous years' financial statements between 2009 and 2014, when the old CEO running the totalCare business liked a lot by Sequoia was still there and I thought they would have been gushing tons of free cash flows each year.
However, what I saw was this:
1. Every single year's depreciation+amortization cost is much less (about 50% less) than the "addition of intangible assets" + "addition of PPE" in its consolidated cash flow statement.
2. Each year's FCF, which I defined as OCF minus ("addition of intangible assets" + "addition of PPE"), is only about half that of the OCF, and the amount is around 0.3-0.5 bn per year. Very small amount indeed.

Given that, I would not figure out why it is even worth today's 13 bn market cap.

The thesis of lack of FCF is that we are going through a "super-cycle". RR (and GE) both have one-a-lifetime huge backlog of orders and are investing heavily to increase their production capacities.

http://finance.yahoo.com/news/aerospace-climbs-supercycle-204300442.html

The difficulty with RR is how to figure out its normalise FCF. I'm still pondering on this...

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Phaceliacapital

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Re: RR - Rolls-Royce
« Reply #17 on: July 31, 2015, 07:30:28 AM »
Looks like he followed the smart money (myself of course).

Where did you find this?
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Phaceliacapital

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Re: RR - Rolls-Royce
« Reply #18 on: July 31, 2015, 07:50:39 AM »
(BN) Rolls-Royce Says Activist Fund ValueAct Becomes Biggest Inv estor

+------------------------------------------------------------------------------+

Rolls-Royce Says Activist Fund ValueAct Becomes Biggest Investor
2015-07-31 14:46:25.279 GMT


By Andrea Rothman
     (Bloomberg) -- Rolls-Royce Holdings Plc said that ValueAct Capital Management has amassed a 5.44 percent stake, a move that makes the activist hedge fund run by Jeffrey Ubben the engine- makers biggest investor, according to Bloomberg data.
     San Francisco-based ValueAct manages more than $18 billion and has helped influence the direction of companies including Microsoft Corp., Sara Lee Corp., Adobe Systems Inc., Valeant Pharmaceuticals International Inc. and Motorola Solutions Inc.
     Rolls-Royce’s disclosure comes with new Chief Executive Officer Warren East only four weeks into the job after his predecessor stood down following a series of profit revisions.
East has already halted a share buyback to preserve dwindling cash reserves as he seeks to clean up operations.
     “We welcome any investor who recognizes the long-term value of our business,” Rolls-Royce said in a statement. “We have frequent communication with all of our shareholders and meet with major investors on a regular basis. We look forward to engaging with ValueAct, just as we do with all investors.”
 Activist funds generally acquire equity stakes in public companies and seek to pressure management and directors for changes that boost shareholder returns. ValueAct has served on at least 38 public company boards and typically seeks influence behind the scenes, often with a directorship.
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menlo

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Re: RR - Rolls-Royce
« Reply #19 on: July 31, 2015, 08:25:24 AM »
More here: http://www.andvariassociates.com/rolling-with-rolls-royce/

There's a link in the article to a very thorough write up from a year ago.