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General Category => Investment Ideas => Topic started by: Alex.N.B on April 22, 2015, 05:13:27 AM

Title: RR - Rolls-Royce
Post by: Alex.N.B on April 22, 2015, 05:13:27 AM
Seems like the company has performed rather poorly over the last two years.

Ruane Cunniff was a big holder for a while and talked about the poor corporate governance and diversification strategy in their latest annual letter:
http://www.sequoiafund.com/Reports/Annual/Ann14.pdf

It seems like they have a great jet engine/civil aviation business and it could be possible that the market is not properly valuing the company at this point as a result of its "conglomerate" structure. 

RR also recently won some new contracts with Emirates:

Rolls-Royce wins $9.2B order from Emirates for Trent 900 engines, support Rolls-Royce (RYCEY) has won its largest ever order, worth $9.2B, to provide Trent 900 engines and TotalCare service support to Emirates. The engines will power 50 Airbus (EADSY) A380 aircraft that will enter service from 2016.


With the recent CEO change, wanted to see if anyone had any thoughts on the company going forward / any insights on the new CEO / current valuation?

http://www.bloomberg.com/news/articles/2015-04-22/rolls-royce-names-east-as-new-ceo-amid-investor-discontent

Title: Re: RR/ Rolls-Royce
Post by: Cunninghamew on April 22, 2015, 06:02:57 AM
We looked at it and like the basic thesis - RR sells engines up front at low to no margin and then picks it up over the life of the engine via total care contracts. They have a good investor day presentation on the total care contract.

Unfortunately, we couldn't get a good feel for the future cash flows they will generate from the total care agreements.

If someone has figure out the exact economics would love to learn from your research
Title: Re: RR/ Rolls-Royce
Post by: kab60 on April 22, 2015, 06:43:06 AM
I believe it's a pretty big position for Sequoia Fund and they compared it a bit to Precision Castparts in a letter to investors I seem to recall. I took a look at RR when it was lower than today but the business was too complex for me to come up with much of a valuation range (I'm still very much a rookie).
Title: Re: RR/ Rolls-Royce
Post by: muscleman on April 22, 2015, 07:44:37 AM
I remember RR was mentioned in longleaf partner's recent letter. They said the change in CEO was by the board to aggressively push EPS up. The new CEO wasn't good and decided to expand into marine engines sector. I can't totally remember that though. You can look it up and see if it helps.
Title: Re: RR/ Rolls-Royce
Post by: A Dhandho Investor on April 22, 2015, 08:22:21 AM
John Hempton is also long:
http://brontecapital.blogspot.be/2015/03/rolls-royce-and-sequoia-letter.html
Title: Re: RR/ Rolls-Royce
Post by: KCLarkin on April 22, 2015, 01:36:23 PM
Neil Woodford is long.
http://www.whatinvestment.co.uk/financial-news/shares-and-trading/2473927/neil-woodford-why-iand39ve-been-buying-more-rollsroyce-shares-despite-the-bad-news.thtml
Title: Re: RR/ Rolls-Royce
Post by: Phaceliacapital on July 20, 2015, 12:32:44 AM
[Delayed] Rolls-Royce Holdings   RR.    Rolls-Royce Trent 700 Worth $930m Selected By IAFC
2015-07-20 07:02:18.810 GMT



  Rolls-Royce Holdings (RR.) - Rolls-Royce Trent 700 Worth $930m Selected By
  IAFC

RNS Number : 4344T
Rolls-Royce Holdings plc
20 July 2015

                                                                  20 July 2015

ROLLS-ROYCE TRENT 700 ENGINES WORTH $930M SELECTED BY INTERNATIONAL AIRFINANCE
                                 CORPORATION

 

Rolls-Royce has been selected by International AirFinance Corporation (IAFC) to provide Trent 700 engines, worth $930m, for 20 Airbus A330 Regional aircraft.

The Trent 700 is the clear market leader on the A330 with more than 60 per cent of new orders over the last three years. The Trent 700 now accounts for
90 per cent of A330 freighters in service and on order

Moulay Omar Alaoui, International AirFinance Corporation, President and CEO,
said: "We selected the Trent 700 as the best solution in terms of economics and reliability."

Eric Schulz, Rolls-Royce, President - Civil Large Engines, said: "We welcome our customer's confidence in the Trent 700 as the best solution for fuel burn, emissions and noise performance as well as delivering unrivalled reliability for Middle East operations."

More than 1,500 Trent 700s are now in service or on firm order, making it the largest in-service Trent engine.

About Rolls-Royce Holdings plc

1.   This Original Equipment order will result in an increase in the Group's order book of $930m, in accordance with Group accounting policy and is linked to the TotalCare® order announced today. The value of the contract is consistent with the disclosures set out in the recent market update issued by Rolls-Royce Holdings plc on 6 July 2015.

2.   Rolls-Royce's vision is to create better power for a changing world via two main business divisions, Aerospace and Land & Sea. These business divisions address markets with two strong technology platforms, gas turbines and reciprocating engines. Aerospace comprises Civil Aerospace and Defence Aerospace. Land & Sea comprises Marine, Nuclear and Power Systems.

3.   Rolls-Royce has customers in more than 120 countries, comprising more than 380 airlines and leasing customers, 160 armed forces, 4,000 marine customers including 70 navies, and more than 5,000 power and nuclear customers.

4.   Our business is focused on the 4Cs:

·      Customer - placing the customer at the heart of our business

·      Concentration - deciding where to grow and where not to

·      Cost - continually looking to increase efficiency

·      Cash - improving financial performance.
 

5.   Annual underlying revenue was £14.6 billion in 2014, around half of which came from the provision of aftermarket services. The firm and announced order book stood at £73.7 billion at the end of 2014.

6.   In 2014, Rolls-Royce invested £1.2 billion on research and development.
We also support a global network of 31 University Technology Centres, which position Rolls-Royce engineers at the forefront of scientific research.

7.   Rolls-Royce employs over 54,000 people in more than 50 countries. Over
15,500 of these are engineers.

8.   The Group has a strong commitment to apprentice and graduate recruitment and to further developing employee skills. In 2014 we employed 354 graduates and 357 apprentices through our worldwide training programmes. Globally we have over 1,000 Rolls-Royce STEM ambassadors who are actively involved in education programmes and activities; we have set ourselves a target to reach 6 million people through our STEM outreach activities by 2020.
Title: Re: RR - Rolls-Royce
Post by: Arden on July 29, 2015, 12:02:37 AM
Interesting writeup on seeking alpha
http://seekingalpha.com/article/3311125-rolls-royce-recent-dip-is-an-opportunity-long-term-outlook-remains-intact
Title: Re: RR - Rolls-Royce
Post by: muscleman on July 29, 2015, 08:22:21 AM
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.
Title: Re: RR - Rolls-Royce
Post by: Arden on July 29, 2015, 11:18:29 AM
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
Title: Re: RR - Rolls-Royce
Post by: muscleman 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?
Title: Re: RR - Rolls-Royce
Post by: Arden 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

Title: Re: RR - Rolls-Royce
Post by: kirkomi 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 ?

Regards
Title: Re: RR - Rolls-Royce
Post by: muscleman 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.
Title: Re: RR - Rolls-Royce
Post by: muscleman 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.
Title: Re: RR - Rolls-Royce
Post by: portfolio14 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...
Title: Re: RR - Rolls-Royce
Post by: Liberty on July 31, 2015, 05:56:18 AM
Ubben:

http://otp.investis.com/clients/uk/rolls-royce1/rns/regulatory-story.aspx?cid=171&newsid=551060
Title: Re: RR - Rolls-Royce
Post by: Phaceliacapital on July 31, 2015, 07:30:28 AM
Looks like he followed the smart money (myself of course).

Where did you find this?
Title: Re: RR - Rolls-Royce
Post by: Phaceliacapital 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.
Title: Re: RR - Rolls-Royce
Post by: menlo on July 31, 2015, 08:25:24 AM
More here: http://www.andvariassociates.com/rolling-with-rolls-royce/ (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.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on July 31, 2015, 09:23:04 AM
I am in with a 3% position. This is one company desperately in need of Ubben.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on July 31, 2015, 11:39:23 AM
 Came across this:
http://www.gwinvestors.com/wp-content/uploads/2015/07/Rolls-Royce-Mind-the-Gap.pdf
Title: Re: RR - Rolls-Royce
Post by: sampr01 on August 03, 2015, 11:11:26 PM
What is the difference between RYCEF and RYCEY?
Title: Re: RR - Rolls-Royce
Post by: rogermunibond on August 04, 2015, 12:45:10 PM
RYCEY is the ADR; and RYCEF is the OTC traded London shares
Title: Re: RR - Rolls-Royce
Post by: sampr01 on August 04, 2015, 01:19:54 PM
Why ADR is 5 times expensive than OTC traded shares. Thanks
Title: Re: RR - Rolls-Royce
Post by: Schwab711 on August 04, 2015, 01:30:51 PM
http://www.nasdaqtrader.com/content/technicalsupport/specifications/dataproducts/nasdaqfifthcharactersuffixlist.pdf

The 5th symbol in a ticker always has a defined meaning. The F mean it's priced in a foreign currency (not USD) and you will have some currency risk.
Title: Re: RR - Rolls-Royce
Post by: rb on August 04, 2015, 01:48:26 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?

Typical total care contracts are about 15 years.

The life of an engine is 20-30 years. During that time the aftermarket revenue is about 3 times the price of the engine with a fat margin.
Title: Re: RR - Rolls-Royce
Post by: sampr01 on August 04, 2015, 01:55:33 PM
Please can you help me out with why there is huge price difference between two

RYCEY: $64
RYCEF:$12.70

Which one is beneficial to hold. Thanks
Title: Re: RR - Rolls-Royce
Post by: cubsfan on August 04, 2015, 02:00:37 PM
Please can you help me out with why there is huge price difference between two

RYCEY: $64
RYCEF:$12.70

Which one is beneficial to hold. Thanks

The ADR RYCEY gives you 5 shares of RYCEF.
RYCEY is fairly liquid as well - I own RYCEY.
Title: Re: RR - Rolls-Royce
Post by: rb on August 04, 2015, 02:02:05 PM
Why don't you just buy RR in London?
Title: Re: RR - Rolls-Royce
Post by: cubsfan on August 04, 2015, 02:06:54 PM
Why don't you just buy RR in London?

I could buy the ADR and it's fairly liquid with no premium - was just easier directly via Schwab.
Title: Re: RR - Rolls-Royce
Post by: sampr01 on August 04, 2015, 02:18:05 PM
Thanks cubsfan. I was thinking same but unable to find any info Thanks
Title: Re: RR - Rolls-Royce
Post by: cubsfan on August 04, 2015, 02:20:21 PM
Thanks cubsfan. I was thinking same but unable to find any info Thanks

Sampr - here you go:

http://www.rolls-royce.com/investors/shareholders/frequently-asked-questions/about-your-shareholding.aspx

7. Which Stock Exchange is the Company listed on?

The Company is listed on the London Stock Exchange. The Company’s ticker symbol is RR. Rolls-Royce Ordinary Shares are also traded “over the counter” in the United States in the form of a sponsored American Depositary Receipt (ADR) facility with The Bank of New York Mellon as the depositary. Each ADR represents five Ordinary Shares
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on August 04, 2015, 05:53:55 PM
Why don't you just buy RR in London?

Someone please corrects me if i'm wrong. I think you can avoid the 0.5% British stamp duty if you buy ADR instead of RR.L? And ADR is exempt from SDRT.

Besides, does anyone know what happens when Rolls-Royce distributes Class C preference shares as dividends if I hold ADR?
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on August 04, 2015, 05:56:47 PM
Typical total care contracts are about 15 years.

Where did you get this information?

By the way, the expiry of a TotalCare contract doesn't mean it's the end of the revenue. The engine still requires replacement parts even if it's serviced by 3rd party MRO. Parts have a 50-80% margin.
Title: Re: RR - Rolls-Royce
Post by: rb on August 04, 2015, 06:06:55 PM
Why don't you just buy RR in London?

Someone please corrects me if i'm wrong. I think you can avoid the 0.5% British stamp duty if you buy ADR instead of RR.L? And ADR is exempt from SDRT.

Besides, does anyone know what happens when Rolls-Royce distributes Class C preference shares as dividends if I hold ADR?

You're right you would save the stamp duty if you buy the ADR. I like generally like to own the underlying instead of the ADR because the ADR sometimes has some tax disadvantages but not in the case of UK companies. In RR's case I tend to be paranoid of unsponsored ADRs that don't trade on an exchange. I always imagine liquidity disappearing and other stuff like that. So I guess I pay the stamp duty as a bit of peace of mind. I tend to hold tings long term so it's not that big of a deal. But that's just me.

I regards to the C-shares for the ADR if I remember correctly RR covers that on their investor site. But even better get the ADR documentation and read that. It should cover everything. I'm pretty sure ADR administrator is BoNY.
Title: Re: RR - Rolls-Royce
Post by: rb on August 04, 2015, 06:15:19 PM
Typical total care contracts are about 15 years.

Where did you get this information?

By the way, the expiry of a TotalCare contract doesn't mean it's the end of the revenue. The engine still requires replacement parts even if it's serviced by 3rd party MRO. Parts have a 50-80% margin.

Can't remember exactly where I got the info re the 15 yr total care contracts. It was from one of the RR presentations or management calls. The engines have a life of 20-30 years but the initial care contracts cover 15. They still require parts after that but management didn't get into detail on what happens after the first 15. Maybe they do another Total Care contract for old engines or it moves to a pay as you go system for parts. What is clear is that there is after-market revenue after the first 15 years.

You are also correct that there is after-market revenue even if the engine is not under Total Care, but I think that the margins under total care may be somewhat higher and airlines pay that for the benefit of smoothing out cash flow. Also some services like real live tracking of the engines is not available if they don't buy total care.
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on August 04, 2015, 07:38:02 PM
Thanks rb.

If we look at RR's presentations, they seem to imply the cashflows from the TotalCare contracts will only catch up with recognised revenues after ~10 years. With such a long lag, the discount rate (i.e. time value of money) becomes a factor. I don't think RR does a NPV adjustment when they recognise the revenues. They only do an accounting sum. At least that's what I can see from their financial statements.

There is no further details in the financial statements to explain how recognised revenues can be reconciled to future cashflow. You got to wonder whether their accounting revenues are overstating their true econimcal earning power or not. I'm still scratching my head, trying to establish that.
Title: Re: RR - Rolls-Royce
Post by: rb on August 04, 2015, 07:49:41 PM
Thanks rb.

If we look at RR's presentations, they seem to imply the cashflows from the TotalCare contracts will only catch up with recognised revenues after ~10 years. With such a long lag, the discount rate (i.e. time value of money) becomes a factor. I don't think RR does a NPV adjustment when they recognise the revenues. They only do an accounting sum. At least that's what I can see from their financial statements.

There is no further details in the financial statements to explain how recognised revenues can be reconciled to future cashflow. You got to wonder whether their accounting revenues are overstating their true econimcal earning power or not. I'm still scratching my head, trying to establish that.

No, that's not the case. They used to have a presentation that went into detail on Total Care. I just checked and they seem to have taken it down - Beats me why. In that one they went over cash flows year by year and it was basically first few years really cash positive then year 3 or so dips back to cumulative negative then starts to grow again. I'm really mad right now that I didn't save it.

Regarding the accounting. These total care contracts are a nightmare and makes RR's accounting one of the most complicated I've seen. I don't want to dip into the statements right now. But I'm pretty sure the contracts have to be booked at the discounted value. RR reports under IFRS and they make you do that for everything.
Title: Re: RR - Rolls-Royce
Post by: muscleman on August 04, 2015, 08:02:08 PM
Why don't you just buy RR in London?

I could buy the ADR and it's fairly liquid with no premium - was just easier directly via Schwab.

Be careful about ADR fees though. Do you know the annual ADR fee on this one?
Title: Re: RR - Rolls-Royce
Post by: rb on August 04, 2015, 08:07:42 PM
Why don't you just buy RR in London?

I could buy the ADR and it's fairly liquid with no premium - was just easier directly via Schwab.

Be careful about ADR fees though. Do you know the annual ADR fee on this one?

I don't know cause I didn't bother checking due to my paranoia regarding non exchange traded ADRs. The fee should be in the aforementioned ADR documentation at the sponsor. Great point though.

Btw, I think that anyone buying any ADR should read the docs first.
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on August 04, 2015, 08:38:48 PM
No, that's not the case. They used to have a presentation that went into detail on Total Care. I just checked and they seem to have taken it down - Beats me why. In that one they went over cash flows year by year and it was basically first few years really cash positive then year 3 or so dips back to cumulative negative then starts to grow again. I'm really mad right now that I didn't save it.

Regarding the accounting. These total care contracts are a nightmare and makes RR's accounting one of the most complicated I've seen. I don't want to dip into the statements right now. But I'm pretty sure the contracts have to be booked at the discounted value. RR reports under IFRS and they make you do that for everything.

Very useful details. Many thanks. Would you have one of those old presentations handy?

I'm pretty sure the accounting breakdowns are not in their 2014 annual report, including the footnotes. I've just read through it this morning. Unless you are telling me in UK what they are filing with the regulators don't have to go into the annual reports.

p.s. They took them down: maybe because of the restating of the risk-sharing fees forced by FRC, so that the figures are no longer inaccurate?
Title: Re: RR - Rolls-Royce
Post by: rb on August 04, 2015, 09:02:15 PM
I'm sorry, I don't have it. I didn't save it. Kicking myself now for that. The pres wasn't that old. I think it was in 2014 and was on the site just a couple of months ago. I don't think it was a reg issue or the figures were wrong. It was more like a guideline of how the cash flows work over time. Not legal or anything like that.
Title: Re: RR - Rolls-Royce
Post by: Phaceliacapital on August 04, 2015, 11:29:52 PM
What exactly are your main questions surrounding totalcare contracts?
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on August 05, 2015, 04:25:26 AM
What exactly are your main questions surrounding totalcare contracts?

1. What discount rate do they use to recognise future cashflow as today's revenues? My gut feeling is 0%. (I think that's the IFRS standard but rb thinks it's not.) If so, accounting profit is overstating the actual earning power.

2. Is there a numerical example showing what the actual cashflow looks like for a single contract over its lifetime and how the revenue is recognised?
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on August 05, 2015, 05:05:51 AM
What exactly are your main questions surrounding totalcare contracts?

1. What discount rate do they use to recognise future cashflow as today's revenues? My gut feeling is 0%. (I think that's the IFRS standard but rb thinks it's not.) If so, accounting profit is overstating the actual earning power.

2. Is there a numerical example showing what the actual cashflow looks like for a single contract over its lifetime and how the revenue is recognised?

I think I found the answer to my question 1.

Accounting of Linked TotalCare is governed by IFRS IAS 11. Accounting of Unlinked TotalCare is governed by IAS 18. Deferred revenue is discounted to arrive at a "fair value".

http://www.accaglobal.com/an/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/revenue-recognition.html



Title: Re: RR - Rolls-Royce
Post by: NJL on August 05, 2015, 12:03:42 PM
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


http://www.rolls-royce.com/~/media/Files/R/Rolls-Royce/documents/investors/results/presentations-and-briefings/rolls-royce-2014-investor-briefing-19-06-2014-transcript-tcm92-58286.pdf


Keep in mind that the new engines for the monopoly planes (A350, A330neo) will mostly be unlinked contracts.
Title: Re: RR - Rolls-Royce
Post by: Picasso on August 05, 2015, 12:04:57 PM
Anyone have thoughts on the weakness the energy downturn will have on Rolls Royce?  I want to invest alongside ValueAct on this one, but you have a few moving pieces that all need to work out and they are largely tied to energy.  There's no guarantee that they can or will unload the crappy business segments.  Unless there is a natural buyer who would benefit from those segments?  Otherwise RR will continue to announce disappointing earnings and this will erode all the activist gains.
Title: Re: RR - Rolls-Royce
Post by: rb on August 05, 2015, 12:06:40 PM
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


http://www.rolls-royce.com/~/media/Files/R/Rolls-Royce/documents/investors/results/presentations-and-briefings/rolls-royce-2014-investor-briefing-19-06-2014-transcript-tcm92-58286.pdf


Keep in mind that the new engines for the monopoly planes (A350, A330neo) will mostly be unlinked contracts.
THANK YOU SIR!
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on August 06, 2015, 07:27:41 AM
Anyone have thoughts on the weakness the energy downturn will have on Rolls Royce?  I want to invest alongside ValueAct on this one, but you have a few moving pieces that all need to work out and they are largely tied to energy.  There's no guarantee that they can or will unload the crappy business segments.  Unless there is a natural buyer who would benefit from those segments?  Otherwise RR will continue to announce disappointing earnings and this will erode all the activist gains.

Actually, I have the opposite view. It seems like all of their businesses are at or near cyclical lows:
- defense aviation (hurt by sequester)
- wide body (temporary lull until Airbus ramps up new planes)
- business jets (not sure what is causing this weakness because low fuel prices should drive more usage)
- land and sea (low oil prices)
- high investment ahead of big order book
- weak margins in civil aviation
- FX impacts

Once you get past 2016, the order book for wide-body engines is so strong, the rest of the business is largely immaterial. If they can deliver on their order book and get their costs under control, this puppy is going to fly.
Title: Re: RR - Rolls-Royce
Post by: Phaceliacapital on August 06, 2015, 07:28:55 AM
Agree.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on August 11, 2015, 08:33:31 AM
Found this interesting tidbit in an article about Jeffrey Ubben:

Quote
At Fidelity, he rose from analyst to run its defense-aerospace and utilities funds before taking over the value fund.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on August 11, 2015, 09:55:10 AM
Neil Woodford (the UK Buffett), has a good summary of the RR thesis:

Quote
Rolls-Royce remains a quality business with superb technology, operating in an industry with very high barriers to entry. It has a substantial long-term forward order book that is the product of a well-executed long-term strategy, years of meticulous product development and a proven business model. In increasing capacity to fulfil the order book it has experienced some growing pains, but we remain confident that the business can deliver to the long-term order book successfully and profitably.

In the same statement which caused the shares to slide, Rolls-Royce has for the first time provided medium-term guidance that comfortably beat market expectations. If it achieves its stated targets for 2018, current earnings forecasts will be way too low. As long-term investors, this is exactly the sort of market inefficiency that we aim to exploit – the market is focusing on the short-term disappointment, whereas we look beyond this to assess the long-term opportunity.

This is from November and shares are substantially cheaper now.
http://www.whatinvestment.co.uk/financial-news/shares-and-trading/2473927/neil-woodford-why-iand39ve-been-buying-more-rollsroyce-shares-despite-the-bad-news.thtml

Title: Re: RR - Rolls-Royce
Post by: rb on August 11, 2015, 11:54:16 AM
Neil Woodford (the UK Buffett), has a good summary of the RR thesis:

Quote
Rolls-Royce remains a quality business with superb technology, operating in an industry with very high barriers to entry. It has a substantial long-term forward order book that is the product of a well-executed long-term strategy, years of meticulous product development and a proven business model. In increasing capacity to fulfil the order book it has experienced some growing pains, but we remain confident that the business can deliver to the long-term order book successfully and profitably.

In the same statement which caused the shares to slide, Rolls-Royce has for the first time provided medium-term guidance that comfortably beat market expectations. If it achieves its stated targets for 2018, current earnings forecasts will be way too low. As long-term investors, this is exactly the sort of market inefficiency that we aim to exploit – the market is focusing on the short-term disappointment, whereas we look beyond this to assess the long-term opportunity.

This is from November and shares are substantially cheaper now.
http://www.whatinvestment.co.uk/financial-news/shares-and-trading/2473927/neil-woodford-why-iand39ve-been-buying-more-rollsroyce-shares-despite-the-bad-news.thtml

Quote
Rolls-Royce, which is best known as a car company but derives most of its revenue from engineering

The author is a moron. The Woodford quotes are still good.
Title: Re: RR - Rolls-Royce
Post by: yadayada on August 11, 2015, 03:22:12 PM
Some reading material down below. A nice history and analysis. on the company.

edit: half way through, and analysis is probably best iv seen in a long time on any company.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on August 20, 2015, 06:19:11 PM
http://www.marketwatch.com/story/activist-shareholders-move-to-get-rolls-royce-airborne-2015-08-19?siteid=yhoof2
Title: Re: RR - Rolls-Royce
Post by: undervalued on August 21, 2015, 11:26:43 AM
Why don't you just buy RR in London?

I could buy the ADR and it's fairly liquid with no premium - was just easier directly via Schwab.

Be careful about ADR fees though. Do you know the annual ADR fee on this one?

I've been searching for the ADR fees. I can't find it on BNY ADR website http://www.adrbnymellon.com/dr_profile.jsp?cusip=775781206 (http://www.adrbnymellon.com/dr_profile.jsp?cusip=775781206) nor the prospectus at EDGAR http://www.sec.gov/Archives/edgar/data/862346/000120193511000055/0001201935-11-000055.txt (http://www.sec.gov/Archives/edgar/data/862346/000120193511000055/0001201935-11-000055.txt). Did anyone find it?
Title: Re: RR - Rolls-Royce
Post by: rb on August 21, 2015, 04:18:55 PM
Ok the ADR sponsor is JP Morgan.

I think probably the easiest way to find out about the fees is to call them and ask. The number is 1-800-990-1135.

Just a heads up for other people here that are looking at the ADRs that there is a corporate action in place where the shares per ADR are changing from 5 shares per ADR to 1 share per ADR. The record date is Aug 20 and effective date is Aug 28.
Title: Re: RR - Rolls-Royce
Post by: wbr on August 22, 2015, 12:42:30 AM
Some reading material down below. A nice history and analysis. on the company.

edit: half way through, and analysis is probably best iv seen in a long time on any company.

Thank you!
Title: Re: RR - Rolls-Royce
Post by: nodnub on August 22, 2015, 01:10:34 AM
Why don't you just buy RR in London?

I could buy the ADR and it's fairly liquid with no premium - was just easier directly via Schwab.

Be careful about ADR fees though. Do you know the annual ADR fee on this one?

I've been searching for the ADR fees. I can't find it on BNY ADR website http://www.adrbnymellon.com/dr_profile.jsp?cusip=775781206 (http://www.adrbnymellon.com/dr_profile.jsp?cusip=775781206) nor the prospectus at EDGAR http://www.sec.gov/Archives/edgar/data/862346/000120193511000055/0001201935-11-000055.txt (http://www.sec.gov/Archives/edgar/data/862346/000120193511000055/0001201935-11-000055.txt). Did anyone find it?

I feel like I am missing something in all this fuss about ADR fees.  Everything I can find for typical ADR admin fees is on the order of a few cents per share per year.

This might be what you need for RR?  https://www.bamsec.com/filing/119380515001291/2?cik=1649568

(7)  Charges of Depositary.  The Depositary may charge, and collect from, (i) each person to whom ADSs are issued, including, without limitation, issuances against deposits of Shares, issuances in respect of Share Distributions, Rights and Other Distributions (as such terms are defined in paragraph (10)), issuances pursuant to a stock dividend or stock split declared by the Company, or issuances pursuant to a merger, exchange of securities or any other transaction or event affecting the ADSs or the Deposited Securities, and (ii) each person surrendering ADSs for withdrawal of Deposited Securities or whose ADSs are cancelled or reduced for any other reason, U.S.$5.00 for each 100 ADSs (or portion thereof) issued, delivered, reduced, cancelled or surrendered (as the case may be). The Depositary may sell (by public or private sale) sufficient securities and property received in respect of Share Distributions, Rights and Other Distributions prior to such deposit to pay such charge. The following additional charges shall be incurred by the Holders, by any party depositing or withdrawing Shares or by any party surrendering ADSs, to whom ADSs are issued (including, without limitation, issuances pursuant to a stock dividend or stock split declared by the Company or an exchange of stock regarding the ADSs or the Deposited Securities or a distribution of ADSs pursuant to paragraph (10)), whichever is applicable (i) a fee of U.S.$0.05 or less per ADS for any Cash distribution made pursuant to the Deposit Agreement, (ii) a fee of U.S.$1.50 per ADR or ADRs for transfers made pursuant to paragraph (3) hereof, (iii) a fee for the distribution or sale of securities pursuant to paragraph (10) hereof, such fee being in an amount equal to the fee for the execution and delivery of ADSs referred to above which would have been charged as a result of the deposit of such securities (for purposes of this paragraph (7) treating all such securities as if they were Shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by the Depositary to Holders entitled thereto, (iv) an aggregate fee of U.S.$0.05 per ADS per calendar year (or portion thereof) for services performed by the Depositary in administering the ADRs (which fee may be charged on a periodic basis during each calendar year and shall be assessed against Holders as of the record date or record dates set by the Depositary during each calendar year and shall be payable at the sole discretion of the Depositary by billing such Holders or by deducting such charge from one or more cash dividends or other cash distributions), and (v) a fee for the reimbursement of such fees, charges and expenses as are incurred by the Depositary and/or any of its agents (including, without limitation, the Custodian and expenses incurred on behalf of Holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in connection with the servicing of the Shares or other Deposited Securities, the sale of securities (including, without limitation, Deposited Securities), the delivery of Deposited Securities or otherwise in connection with the Depositary's or its Custodian's compliance with applicable law, rule or regulation (which fees and charges shall be assessed on a proportionate basis against Holders as of the record date or dates set by the Depositary and shall be payable at the sole discretion of the Depositary by billing such Holders or by deducting such charge from one or more cash dividends or other cash distributions). The Company will pay all other charges and expenses of the Depositary and any agent of the Depositary (except the Custodian) pursuant to agreements from time to time between the Company and the Depositary, except (i) stock transfer or other taxes and other governmental charges (which are payable by Holders or persons depositing Shares), (ii) cable, telex and facsimile transmission and delivery charges incurred at the request of persons depositing, or Holders delivering Shares, ADRs or Deposited Securities (which are payable by such persons or Holders), (iii) transfer or registration fees for the registration or transfer of Deposited Securities on any applicable register in connection with the deposit or withdrawal of Deposited Securities (which are payable by persons depositing Shares or Holders withdrawing Deposited Securities; there are no such fees in respect of the Shares as of the date of the Deposit Agreement), and (iv) in connection with the conversion of foreign currency into U.S. dollars, JPMorgan Chase Bank, N.A. ("JPMorgan") shall deduct out of such foreign currency the fees, expenses and other charges charged by it and/or its agent (which may be a division, branch or affiliate) so appointed  in connection with such conversion.  JPMorgan and/or its agent may act as principal for such conversion of foreign currency.  Such charges may at any time and from time to time be changed by agreement between the Company and the Depositary.  For further details see https://www.adr.com.
Title: Re: RR - Rolls-Royce
Post by: doughishere on August 23, 2015, 08:48:42 AM
Not sure if you've seen this.

Cool documentary on RR

https://m.youtube.com/watch?v=UazsDDFsS7Q&feature=youtu.be
Title: Re: RR - Rolls-Royce
Post by: Picasso on August 23, 2015, 12:15:27 PM
I can see how Rolls shows half the margins of GE. It looks like their production line is stuck back in the 1990's.

You also have a town built around Rolls. Sort of hard to cut jobs or make big organizational changes.
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on August 23, 2015, 03:49:48 PM
I can see how Rolls shows half the margins of GE. It looks like their production line is stuck back in the 1990's.

You also have a town built around Rolls. Sort of hard to cut jobs or make big organizational changes.

This is interesting. This is almost an opposite take from GreenWood's thesis that RR has lower margins because they mistakenly outsource high value-add operations.

Could you elaborate what you mean by "stucking back in the 1990s"? RR's technologies is on par with GE's. You can't use 90s technologies to make state-of-the-art jet engines. So the issue isn't inferior technologies.
Title: Re: RR - Rolls-Royce
Post by: Schwab711 on August 23, 2015, 04:04:35 PM
I can see how Rolls shows half the margins of GE. It looks like their production line is stuck back in the 1990's.

You also have a town built around Rolls. Sort of hard to cut jobs or make big organizational changes.

This is interesting. This is almost an opposite take from GreenWood's thesis that RR has lower margins because they mistakenly outsource high value-add operations.

Could you elaborate what you mean by "stucking back in the 1990s"? RR's technologies is on par with GE's. You can't use 90s technologies to make state-of-the-art jet engines. So the issue isn't inferior technologies.

CFM International LEAP (https://en.wikipedia.org/wiki/CFM_International_LEAP) is suposed to have 15% fuel savings over anything else on the market currently. GE/Snecma have already produced ~60 engines for certification and the JV has >5,000 orders (fastest selling jet engine of all-time). They will start commercial production in late-2016 with hopes of fully ramping up capacity by 2018.

http://www.geaviation.com/manufacturing/CFM-LEAP.html

GE also has new gas turbine engines that are more efficient than anything else on the market.

Something to consider. I don't know anything about RR so that's as far as I go.
Title: Re: RR - Rolls-Royce
Post by: rb on August 23, 2015, 04:26:21 PM
CFM International LEAP (https://en.wikipedia.org/wiki/CFM_International_LEAP) is suposed to have 15% fuel savings over anything else on the market currently. GE/Snecma have already produced ~60 engines for certification and the JV has >5,000 orders (fastest selling jet engine of all-time). They will start commercial production in late-2016 with hopes of fully ramping up capacity by 2018.

http://www.geaviation.com/manufacturing/CFM-LEAP.html

GE also has new gas turbine engines that are more efficient than anything else on the market.

Something to consider. I don't know anything about RR so that's as far as I go.
You're not comparing the same things the CFM LEAP engine is a narrow body engine. Rolls is manufacturing engines for wide bodies (also private and regional stuff) and has no engine that would power planes where LEAP could be an application.

If you would like to compare apples to apples you would have to go something like RR Trent XWB or Trent 1000 Vs GEnX
Title: Re: RR - Rolls-Royce
Post by: no_free_lunch on August 23, 2015, 06:56:53 PM
Historical performance has been reasonably strong.  9-10% growth + a 3% dividend.  So a 12-13% total return.  Nothing too crazy but it's more than a cigar butt.  Probably deserves a PE higher than 11.

Year,   Order Book (B Pnd),     Ear Per Share (Pence)
2001   17   20
2002   17   11
2003   19   12
2004   21   16
2005   24   24
2006   26   30
2007   46   34
2008   56   37
2009   58   40
2010   59   39
2011   58   49
2012   60   60
2013   71   65
2014   72   73
2015   74   4
Title: Re: RR - Rolls-Royce
Post by: Picasso on August 23, 2015, 07:25:53 PM
I can see how Rolls shows half the margins of GE. It looks like their production line is stuck back in the 1990's.

You also have a town built around Rolls. Sort of hard to cut jobs or make big organizational changes.

This is interesting. This is almost an opposite take from GreenWood's thesis that RR has lower margins because they mistakenly outsource high value-add operations.

Could you elaborate what you mean by "stucking back in the 1990s"? RR's technologies is on par with GE's. You can't use 90s technologies to make state-of-the-art jet engines. So the issue isn't inferior technologies.

Nothing crazy scientific about my view.  But you have some older guy walking 8-15 miles a day to keep inventories stocked and tens of millions of dollars of parts just laying around.  You can just sort of tell that it's not the most lean operation in the world.

GE is a large industrial player that spent over $10 billion to vertically integrate a good portion of their aviation business.  There are likely benefits to other business segments that makes those decisions a bit easier.  That won't be the case with Rolls.  The entire market cap on Rolls is $20 billion or so, which makes it hard to compete against the $240 billion GE.  I'm not sure how much a few billion of acquisitions will move the needle since GE is likely to continue doing the same.  Rolls is in major catch up mode right now and each day they stand still GE is moving ahead. 

My main question is, what kind of losses will the other 50% of revenue provide in the current energy environment?  I'm not interested in hearing that energy will make a comeback or it's cyclical.  I want to hear a worst case scenario for those divisions and how much capital they'll eat up while the other half of the business is on a tear.  For those who followed the story, Hertz was supposed to take their dominant market shares and do very well.  Instead the equipment rental business didn't do that great and the consolidated numbers have not been that amazing even in a duopoly.  The threat of Uber was a long-term threat for Hertz but the stock has still been crushed despite very good activist investors.  Now you have massive investments by GE in 3D printing and composite blades that can make the next generation from Rolls obsolete. 

Rolls is going to snatch away victory from themselves at the finish line if they don't focus 100% on this.  That said, I need to figure out the worst case on the crappy parts of the business.  It otherwise looks like the current price gives a fairly wide margin of safety while I investigate this.

I'm no expert in aviation (like most investors I'm sure) so my mile high view of the company may be completely off.
Title: Re: RR - Rolls-Royce
Post by: no_free_lunch on August 23, 2015, 07:38:54 PM
The CEO, Warren East, was on Barron's "top 30 CEO" list back in 2011 back when he was at ARM.

"Not all the products that our CEOs make are so well known. ARM Holdings, the British semiconductor-design company, is hardly a household name, but its chips are found in most cellphones and in Apple's red-hot iPad 2. Under CEO Warren East, ARM, founded in a turkey barn, has developed powerful chips that sip, rather than guzzle, electricity -- ideal for battery-powered devices. ARM has outmaneuvered mighty Intel, whose initiatives outside server computers and PCs have gained little traction. Who says there are no innovative tech firms in Europe?"

http://www.barrons.com/news/articles/SB50001424052970204582404576214641280640346

ARM is now the chip in almost half of all mobile devices.  East was CEO from 2001 to 2013 so probably deserves some credit for that.  It looks like the stock was about a 10-12 bagger under his tenure.
Title: Re: RR - Rolls-Royce
Post by: rb on August 23, 2015, 08:54:49 PM
I'm not so gung ho on the CEO. He's done well at ARM but he's not an aviation guy. He may be one those guys who's great no matter where you put him in or he could be mediocre. Only time will tell.

The way I see the Rolls aviation business is that you don't need a lot of leadership from the top. I see critical posts like Rolls production is from 90s or something. Can someone post some content that shows the GE plant operate like the starship enterprise or something?

Actually no matter the technology involved, both GE and Rolls have huge backlogs on shared as well as exclusive platforms that come with very long term maintenance contracts at ridiculously high margins. How can one not make a lot of money from that?

Also by the way based on current back logs Rolls is poised to take quite a bit of market share from GE in wide body. Is that really a sign of obsolete technology?

I know it's a lot of fun to throw thoughts around but let's focus on what's going on. There's money to be made.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on August 25, 2015, 11:07:22 AM
http://www.gwinvestors.com/2015/08/22/rolls-royce-video-the-perfect-storm/
Title: Re: RR - Rolls-Royce
Post by: 60°North Investments on August 29, 2015, 02:00:28 AM
I was trying to buy RR.L options to my IB account but for some reason was unable to do so. Anyone have any idea whether there is some limitation to buying those through IB or was it simply some kind of a one-time error?
Title: Re: RR - Rolls-Royce
Post by: rb on August 29, 2015, 06:19:53 AM
I was trying to buy RR.L options to my IB account but for some reason was unable to do so. Anyone have any idea whether there is some limitation to buying those through IB or was it simply some kind of a one-time error?
If it's in some sort of retirement account there may be restrictions on derivatives.

If it's just a trading account it may not be configured to trade options in London. Check that you are set-up to trade UK and then check whether you are setup to trade options. Also check the "investing objectives" in the account setup. From what I remember in order to trade options I think you need to have either speculation or hedging as objectives.
Title: Re: RR - Rolls-Royce
Post by: 60°North Investments on August 29, 2015, 09:20:33 AM
I was trying to buy RR.L options to my IB account but for some reason was unable to do so. Anyone have any idea whether there is some limitation to buying those through IB or was it simply some kind of a one-time error?
If it's in some sort of retirement account there may be restrictions on derivatives.

If it's just a trading account it may not be configured to trade options in London. Check that you are set-up to trade UK and then check whether you are setup to trade options. Also check the "investing objectives" in the account setup. From what I remember in order to trade options I think you need to have either speculation or hedging as objectives.

Thanks for taking the time rb. It's a "Proprietary Trading Group" account, ie. company's account, there aren't any restrictions on derivatives. I'm buying and selling options monthly, no problems there. And it's also set-up to trade UK options, investing objectives OK as well.

No idea what that is about. Maybe I try with me personal account with which I remember trading Tesco options some years back. If anyone has had similar issues, or any idea what this is about I'd love to hear!
Title: Re: RR - Rolls-Royce
Post by: no_free_lunch on August 30, 2015, 09:37:58 PM
Some comments on RR in the sequoia report.  De-stocking inventory should help with cash-flow the way I see it
Quote
We try to be supportive of the companies we invest in, but sometimes we do not agree with the management team. That is what happened at Rolls-Royce. The board has now chosen a new chief executive with whom we are pleased. We have not had a chance to meet him yet, but I was in London last week and met with the board. The strategy seems to be more in line with what we would like to see. We are looking forward to meeting the new CEO. Our initial research on him has been positive.So we are cautiously optimistic, and we continue to think that the core aerospace business at Rolls-Royce is very attractive
..
Another thing that has hurt is that Rolls-Royceis aggressively trying to take inventory out of its system. Rolls had too much inventory because managers were worried about not being able to meet delivery schedules and overdid it on inventory. Nowthey are cutting back the other way.
Title: Re: RR - Rolls-Royce
Post by: jay21 on August 31, 2015, 05:04:46 AM
Some comments on RR in the sequoia report.  De-stocking inventory should help with cash-flow the way I see it
Quote
We try to be supportive of the companies we invest in, but sometimes we do not agree with the management team. That is what happened at Rolls-Royce. The board has now chosen a new chief executive with whom we are pleased. We have not had a chance to meet him yet, but I was in London last week and met with the board. The strategy seems to be more in line with what we would like to see. We are looking forward to meeting the new CEO. Our initial research on him has been positive.So we are cautiously optimistic, and we continue to think that the core aerospace business at Rolls-Royce is very attractive
..
Another thing that has hurt is that Rolls-Royce is aggressively trying to take inventory out of its system. Rolls had too much inventory because managers were worried about not being able to meet delivery schedules and overdid it on inventory. Now they are cutting back the other way.

It's what this anecdote reveals that is interesting: leaner WC and potentially being tougher on vendors to bring margins up (see their comments on PCP being aggressive in taking profits). It's like an activist might be involved or something.
Title: Re: RR - Rolls-Royce
Post by: doughishere on August 31, 2015, 07:54:43 AM
http://www.gwinvestors.com/2015/08/22/rolls-royce-video-the-perfect-storm/

Is this the new form of activism....youtube videos
Title: Re: RR - Rolls-Royce
Post by: muscleman on September 01, 2015, 08:09:40 AM
http://www.gwinvestors.com/2015/08/22/rolls-royce-video-the-perfect-storm/

Is this the new form of activism....youtube videos

Has anyone gone through the GW investor presentation? I see RR's 2015 H1 aerospace revenue is 3.3 bn pounds. Assuming RR can get to 20% net margin, the earnings from aero space per year would be 3.3 * 2 * 20% = 1.32 bn pounds. A 10x multiple gives a value of 13 bn, which isn't very attractive.

When GW says 22% net margin for GE, does it mean engine sale plus service contracts combined?
Title: Re: RR - Rolls-Royce
Post by: rb on September 01, 2015, 08:21:21 AM
http://www.gwinvestors.com/2015/08/22/rolls-royce-video-the-perfect-storm/

Is this the new form of activism....youtube videos

Has anyone gone through the GW investor presentation? I see RR's 2015 H1 aerospace revenue is 3.3 bn pounds. Assuming RR can get to 20% net margin, the earnings from aero space per year would be 3.3 * 2 * 20% = 1.32 bn pounds. A 10x multiple gives a value of 13 bn, which isn't very attractive.

When GW says 22% net margin for GE, does it mean engine sale plus service contracts combined?
The 22% margin for GE is sales and service.

Why would you price RR at a 10 multiple?
Title: Re: RR - Rolls-Royce
Post by: no_free_lunch on September 01, 2015, 08:57:32 AM
Previously, they were trading around 22x earnings.  Pricing them at 10 seems like more of a conservative lower-bound exercise.  There is also some value in the other divisions.
Title: Re: RR - Rolls-Royce
Post by: muscleman on September 01, 2015, 09:13:48 PM
http://www.gwinvestors.com/2015/08/22/rolls-royce-video-the-perfect-storm/

Is this the new form of activism....youtube videos

Has anyone gone through the GW investor presentation? I see RR's 2015 H1 aerospace revenue is 3.3 bn pounds. Assuming RR can get to 20% net margin, the earnings from aero space per year would be 3.3 * 2 * 20% = 1.32 bn pounds. A 10x multiple gives a value of 13 bn, which isn't very attractive.

When GW says 22% net margin for GE, does it mean engine sale plus service contracts combined?
The 22% margin for GE is sales and service.

Why would you price RR at a 10 multiple?

Probably because I am too greedy and only shooting for the moon.  :D
It has to compete with other positions in my portfolio. For example, why would this be better than CBI, which is already 7X PE and growing at 15%?
Title: Re: RR - Rolls-Royce
Post by: Picasso on September 01, 2015, 09:24:42 PM
Maybe because the P/E ratio of CBI will have very little to do with the returns the business generates on your investment.  There's also the difference of long-term predictable cash flows with RR (not true with CBI), Berkshire selling out of CBI (versus ValueAct going into RR), high barriers to entry for RR, and a very long positive cycle for RR regardless of macro.  Whether they can get their margins up without a lot of capital investment is another story.
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on September 01, 2015, 11:54:50 PM

The most uncomfortable aspect of RR is its TotalCare contracts are blackboxes. They work like insurances. If RR makes the wrong assumptions in the maintenance cost or engine reliability (for the next 15! years usage of an engine), they will misprice the contracts and investors have no way of knowing until it's too late. We have to trust both the skills and the integrity of the management.

This is the main thing holding me back from clicking the buy button.
Title: Re: RR - Rolls-Royce
Post by: compounding on September 02, 2015, 02:06:54 AM

The most uncomfortable aspect of RR is its TotalCare contracts are blackboxes. They work like insurances. If RR makes the wrong assumptions in the maintenance cost or engine reliability (for the next 15! years usage of an engine), they will misprice the contracts and investors have no way of knowing until it's too late. We have to trust both the skills and the integrity of the management.

This is the main thing holding me back from clicking the buy button.

Like insurance, but (practically) without competition, you mean? :)

Also, I don't really see how the cost for maintenance changes dramatically without RR being aware of it. Is it really plausible for the cost per mile flown to be so volatile as to make this an important risk? After all, they built the things and have very large databases on how the engines behave/perform etc. Maybe someone else has more insight here.
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on September 02, 2015, 05:14:42 AM

The most uncomfortable aspect of RR is its TotalCare contracts are blackboxes. They work like insurances. If RR makes the wrong assumptions in the maintenance cost or engine reliability (for the next 15! years usage of an engine), they will misprice the contracts and investors have no way of knowing until it's too late. We have to trust both the skills and the integrity of the management.

This is the main thing holding me back from clicking the buy button.

Like insurance, but (practically) without competition, you mean? :)

Also, I don't really see how the cost for maintenance changes dramatically without RR being aware of it. Is it really plausible for the cost per mile flown to be so volatile as to make this an important risk? After all, they built the things and have very large databases on how the engines behave/perform etc. Maybe someone else has more insight here.

Imagine we wake up one day and hear this news: "Roll-Royce's Head Engineer admits they discovered a design flaw in their Trent XWB engine. He assures the public that safety and performance are not compromised. Rolls-Royce has formulated a new set of guidelines to alter the maintenance schedule and maintenance routines. Airlines covered by TotalCare are not affected materially as "time on wings" are guaranteed. However, the updated maintenance guideline will cost RR 20% more to fulfill its TotalCare contracts."

Oops, our 20% margin is completely gone.

If it were the old days with time and material, RR could've ramp the price. Airlines will be upset but still have to take it. Not with TotalCare.

I always have the impression that investors form the false association that TotalCare is a razor/razor-blade business model. It's not. RR can't raise price of their razor blades. Once an engine is sold with TotalCare, the revenue stream is fixed. From then on, the only lever they have is cost control. With the contracts spanning over decades, RR is taking on huge tail risk in exchange for stable cashflow. So, I really don't know what to think of it, whether TotalCare is a brilliant invention or it's a dud.
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on September 02, 2015, 06:18:24 AM

Imagine we wake up one day and hear this news: "Roll-Royce's Head Engineer admits they discovered a design flaw in their Trent XWB engine. He assures the public that safety and performance are not compromised. Rolls-Royce has formulated a new set of guidelines to alter the maintenance schedule and maintenance routines. Airlines covered by TotalCare are not affected materially as "time on wings" are guaranteed. However, the updated maintenance guideline will cost RR 20% more to fulfill its TotalCare contracts."

Oops, our 20% margin is completely gone.

If it were the old days with time and material, RR could've ramp the price. Airlines will be upset but still have to take it. Not with TotalCare.

I always have the impression that investors form the false association that TotalCare is a razor/razor-blade business model. It's not. RR can't raise price of their razor blades. Once an engine is sold with TotalCare, the revenue stream is fixed. From then on, the only lever they have is cost control. With the contracts spanning over decades, RR is taking on huge tail risk in exchange for stable cashflow. So, I really don't know what to think of it, whether TotalCare is a brilliant invention or it's a dud.

That's a risk but Rolls is always going to live and die buy its engineering quality. I'm also not sure that the sales model is a worse problem in the scenario you've laid out: if maintenance costs come out way higher than thought, that would effect their ability to sell engines with a different profit model anyway.

Likewise, I think you are assuming in this scenario that Rolls would be unable to adjust their engine design and/or contracts for future deliveries were they to discover such a design flaw, or that they would only discover a design flaw well into the lifecycle of the engine when it is too late. I'm not sure how realistic either of those assumptions is. New technologies routinely have problems early in their lifespan resulting in iterative improvements that is characteristic of the engineering process -- engines certainly aren't immune to this.

Regardless of the business model, engineering risk is a very real risk for the company and future maintenance costs are going to be a part of that. 
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on September 02, 2015, 07:58:14 AM
There is an implied warranty anyway. If there is a design flaw, rolls will need to make good or never sell another engine. The risk is real but overstated.
Title: Re: RR - Rolls-Royce
Post by: rb on September 02, 2015, 08:31:38 AM
There isn't just an implied warranty with the engines. The aviation industry is highly regulated. If there is a design flaw with the engine they would have to fix it - total care or not. Sort of like a car recall.

Aside from these one-off design flaws I would expect after all this time that RR has a pretty good handle on the costs involved in the maintenance of a jet engine.
Title: Re: RR - Rolls-Royce
Post by: no_free_lunch on September 02, 2015, 11:13:15 AM
Are the total care contracts infinite or do they have a fixed contract length?  If they have a fixed contract length there should be upside due to the maintenance contracts being renewed.  I am not saying it will happen but I am not sure they are completely capped on the profits.  Of course we are talking timelines in decades.
Title: Re: RR - Rolls-Royce
Post by: rb on September 02, 2015, 11:18:01 AM
The contracts are fixed length
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on September 02, 2015, 04:35:27 PM
- Implied warranty has existed, yes. But in the old days, if warranty cost overblew, RR could've raised T&M prices separately to mitigate it. TotalCare removes this lever/safety valve. I do think business model matters.

- Tough regulations only concern safety, not maintenance cost/frequency.

- "RR has a pretty good handle on the costs involved in the maintenance of a jet engine." This I agree.

- "The risk is real but overstated." Possible. I just don't know how to handicap it. Hence, I said blackbox. In Taleb's lingo, TotalCare makes RR more "fragile", not less. How much more? I dunno.
Title: Re: RR - Rolls-Royce
Post by: rb on September 02, 2015, 09:31:06 PM
- Implied warranty has existed, yes. But in the old days, if warranty cost overblew, RR could've raised T&M prices separately to mitigate it. TotalCare removes this lever/safety valve. I do think business model matters.

- Tough regulations only concern safety, not maintenance cost/frequency.

- "RR has a pretty good handle on the costs involved in the maintenance of a jet engine." This I agree.

- "The risk is real but overstated." Possible. I just don't know how to handicap it. Hence, I said blackbox. In Taleb's lingo, TotalCare makes RR more "fragile", not less. How much more? I dunno.
Portfolio, I think you may be trying to create mountains out od molehills here.

First of all taleb was a guy that called a macro move right, I don't know why he should be an authority on jet engines.

Second of all, this uncertainty about costs is a bit unwarranted. Rolls engines are not new. They're all basically derivatives of the Trent engine. For different application you basically have a bigger fan or a smaller fan or lighter material for this blade or vane. Also these materials are not very new but pretty well tested.

Also back in the day you had quite a bit of after market for engine parts. Also back in the 90s there were a lot of fake parts that made their way into the supply chain. Total care contracts effectively take out this competition, not for Rolls but also for GE. Under these contracts they also have higher margins than before because they offer a cash flow smoothing for airlines. It also offers cash flow smoothing for the suppliers but it appears the appeal is greater for the airlines since they're willing to pay for it.
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on September 02, 2015, 11:47:09 PM
Portfolio, I think you may be trying to create mountains out od molehills here.

Thinking hard about the downside. Can't help. LOL.

Quote
First of all taleb was a guy that called a macro move right, I don't know why he should be an authority on jet engines.

Wow, this I completely disagree. We are talking about risk/epistemology, not macro or jet engine.

Quote
Second of all, this uncertainty about costs is a bit unwarranted. Rolls engines are not new. They're all basically derivatives of the Trent engine. For different application you basically have a bigger fan or a smaller fan or lighter material for this blade or vane. Also these materials are not very new but pretty well tested.

Have you watched the BBC documentary of Roll-Royce?

I agree in general the engine design changes within the Trent family is incremental. But the cutting-edgeness of these modern engines is nothing short of amazing. e.g. How can the combusion components withstand the the temperature higher than the melting point of its meterials?

Quote
Also back in the day you had quite a bit of after market for engine parts. Also back in the 90s there were a lot of fake parts that made their way into the supply chain. Total care contracts effectively take out this competition, not for Rolls but also for GE. Under these contracts they also have higher margins than before because they offer a cash flow smoothing for airlines. It also offers cash flow smoothing for the suppliers but it appears the appeal is greater for the airlines since they're willing to pay for it.

In the T&M days, airlines had to use genuine parts anyway in order not to void the warranties. Of course, warranty durations are shorter than TotalCare contracts. So, there is no doubt TotalCare fends off MRO competitors.
Title: Re: RR - Rolls-Royce
Post by: rb on September 03, 2015, 08:11:11 AM
Portfolio, I think you may be trying to create mountains out od molehills here.

Thinking hard about the downside. Can't help. LOL.

Quote
First of all taleb was a guy that called a macro move right, I don't know why he should be an authority on jet engines.

Wow, this I completely disagree. We are talking about risk/epistemology, not macro or jet engine.

Quote
Second of all, this uncertainty about costs is a bit unwarranted. Rolls engines are not new. They're all basically derivatives of the Trent engine. For different application you basically have a bigger fan or a smaller fan or lighter material for this blade or vane. Also these materials are not very new but pretty well tested.

Have you watched the BBC documentary of Roll-Royce?

I agree in general the engine design changes within the Trent family is incremental. But the cutting-edgeness of these modern engines is nothing short of amazing. e.g. How can the combusion components withstand the the temperature higher than the melting point of its meterials?

Quote
Also back in the day you had quite a bit of after market for engine parts. Also back in the 90s there were a lot of fake parts that made their way into the supply chain. Total care contracts effectively take out this competition, not for Rolls but also for GE. Under these contracts they also have higher margins than before because they offer a cash flow smoothing for airlines. It also offers cash flow smoothing for the suppliers but it appears the appeal is greater for the airlines since they're willing to pay for it.

In the T&M days, airlines had to use genuine parts anyway in order not to void the warranties. Of course, warranty durations are shorter than TotalCare contracts. So, there is no doubt TotalCare fends off MRO competitors.
There's also another aspect of total care the gets ignored a bit. That airlines can get performance tracking on the engines with total care. This goes a long way in predicting when parts will fail and so on. I don't have data on how much money is saved but there must be some cost savings (both for RR and airlines) in the fact that you can change or service a part before it actually breaks.

There's nothing wrong with thinking about the downside. I do that a lot too. I just don't think there's a ton of downside in the Total Care business. With Rolls I'm more concerned about their decision to lower inventory. The Sequoia guys love the decision, I don't. Rolls historically has had a problem with on time deliveries so them taking out inventory when they're about to have a big jump in production doesn't seem  like a very good idea. The penalties for late delivery could add up quickly.
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on September 03, 2015, 03:57:51 PM
rb,

Good discussions.

Another downside I'm worried about is whether they can ramp up the output to meet the demand. This comes before whether they can edge up their margins.
Title: Re: RR - Rolls-Royce
Post by: Picasso on September 10, 2015, 06:20:00 PM
Has anyone been able to source the Lone Pine short thesis?
Title: Re: RR - Rolls-Royce
Post by: Phaceliacapital on September 11, 2015, 07:18:16 AM
How long have they been short?

In other news:

Alan Tovey
     Sept. 10 (Telegraph) -- Rolls-Royce to build and maintain jet engines for Airbus's huge and ungainly Beluga XL transport planes
     Rolls-Royce has won a £500m ($700m) deal to supply and maintain the engines for Airbus’s new fleet of “Beluga” cargo jets.
     The airliner manufacturer uses the ungainly looking aircraft – named after the Beluga whale because its bloated upper fuselage means it bears a striking resemblance to the aquatic mammal – to transport large sections of new planes, such as entire wings.
     Rolls-Royce is being awarded the contract to power the five new aircraft with its bestselling Trent 700 engine. It is a victory for the Derby-based engineer, as Airbus’s current Beluga fleet use engines made by American rival GE.
     Bertrand George, an Airbus vice-president, said: “We look forward to the Trent 700 powering this important development in our air transport strategy. The engine has an excellent record on the A330 and is ideally suited to our requirements for this aircraft.”
     Simon Carlisle, Rolls-Royce executive vice-president, added:
“We welcome this decision to select an engine that is the clear market leader on the A330 and offers outstanding performance in terms of fuel burn, reliability, emissions and noise.”
     The design for Airbus’s new Beluga transporters will be based on the company’s A330 jet, which is larger than the older
A300 model from which the earlier Belugas were developed.
     The five new Beluga XL jets will be able to carry almost a third more cargo than the aircraft currently in service.
     They are needed by Airbus to cope with rising demand. The company is increasing production of its latest A350XWB aircraft and has a record order book approaching 7,000 jets.
     Airbus’s roots as a pan-European aircraft manufacturer means it has facilities located around the continent making major sections of aeroplanes. These are then brought together at final assembly plants in Toulouse, Hamburg and Tiajian in China. A new plant is currently being constructed in Mobile, Alabama.
     Belugas are a regular sight at Airbus’s plant in Broughton, North Wales, where the wings for all of the company’s airliners are manufactured. Airbus recently invested £21m in a new loading dock at the site so Belugas can take on board wings under cover.
     Previously, operations could only be carried out on relatively calm days because when the Belugas’ giant cargo doors were opened they acted as giant sails, making it operations dangerous if gusts touched 30 knots.
     The Trent 700 is Rolls-Royce’s most popular engine, with more than 1,500 in service. It has won 60pc of new orders in its class over the past three years and also powers 90pc of all A330 freighter aircraft.
     However, the Trent 700 has recently been a source of trouble for the company. In July the FTSE 100-listed business issued a profit warning, largely because sales of the engine are set to decline faster than the engineering group had forecast.
     Airbus is running down production of its A330 aircraft, which are powered by Rolls Trent 700 engines, ahead of the introduction of the new A330neo model with more efficient Rolls'
Trent 7000 engines.
     Accordingly, airlines are reluctant to buy the older jet with a new model waiting in the wings, so Airbus is scaling back production.
     But while Rolls had been forecasting a fall in the number of old-model A330s built and sold, the rate of decline has been greater than expected and means the market for its 700 engines and their servicing deals is also shrinking faster than forecast.

Title: Re: RR - Rolls-Royce
Post by: Picasso on September 11, 2015, 07:42:41 AM
They disclosed their short in July.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on September 24, 2015, 07:30:36 AM
Any theories on the 6% drop today?
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on September 24, 2015, 07:38:16 AM
No idea -- I've been looking for news but I haven't found anything.

More generally, I've been trying to dig up a bear case for this but the best I've come up with is the same that's on the board: engineering risk with future deliveries. 
Title: Re: RR - Rolls-Royce
Post by: Phaceliacapital on September 24, 2015, 07:44:53 AM
Market sentiment?

I only see news of new orders and layoffs, which are both good things.
Title: Re: RR - Rolls-Royce
Post by: ATLValue on September 24, 2015, 08:10:57 AM
Do you think it could be the Chinese order going to Boeing? Maybe people were expecting Airbus to win more wide body share?
Title: Re: RR - Rolls-Royce
Post by: Picasso on September 24, 2015, 08:15:51 AM
Do you think it could be the Chinese order going to Boeing? Maybe people were expecting Airbus to win more wide body share?

This is probably it.  Airbus has not been trading that well either.  But Boeing has been trading poorly too.

I'd love to know why Lone Pine shorted the stock.  They probably did it for reasons other than TotalCare because of their typical investing time frame.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on September 24, 2015, 08:18:47 AM
Do you think it could be the Chinese order going to Boeing? Maybe people were expecting Airbus to win more wide body share?

That's my theory but the press release didn't say which model(s) of wide body were ordered. Or what engines.
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on September 24, 2015, 09:09:11 AM
Wait! Maybe people think they make cars.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on September 24, 2015, 09:19:13 AM
Wait! Maybe people think they make cars.

I was thought it might be in some European transportation ETF with the autos but this is a better theory.
Title: Re: RR - Rolls-Royce
Post by: ItsAValueTrap on September 24, 2015, 09:39:16 AM
Will the fall in jet fuel prices hurt purchases of new planes?

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=EER_EPJK_PF4_RGC_DPG&f=M
Title: Re: RR - Rolls-Royce
Post by: Jurgis on September 24, 2015, 01:11:53 PM
If China + EMs + ??? go down very hard, this could hit the air travel and subsequently airplane orders and deliveries.

Everyone seems to be convinced that we are on air travel supercycle going up, but is that really true?

(I am not really in the camp that world is gonna hard land. Also FWIW for me RR is in too hard pile, so my comments here might not be worth much).
Title: Re: RR - Rolls-Royce
Post by: Phaceliacapital on September 24, 2015, 01:42:28 PM
Yeah but with the current backlog a lot of orders have to be cancelled before this is felt in production.. Even in 2008 crisis engine deliveries did not go down.

Over the long term (wars, 9/11, flu, volcanoes, ...) airplane passengers have grown by 4-5% and with more and more low cost airlines + more affluent asian customers I don't see a large downturn taking place.
Title: Re: RR - Rolls-Royce
Post by: jay21 on September 24, 2015, 02:01:17 PM
If China + EMs + ??? go down very hard, this could hit the air travel and subsequently airplane orders and deliveries.

Everyone seems to be convinced that we are on air travel supercycle going up, but is that really true?

(I am not really in the camp that world is gonna hard land. Also FWIW for me RR is in too hard pile, so my comments here might not be worth much).

Hard land would be temporary. World progress is only going one way over the long term.
Title: Re: RR - Rolls-Royce
Post by: Jurgis on September 24, 2015, 03:09:52 PM
Hard land would be temporary. World progress is only going one way over the long term.

Optimists. That's what I like.

Salute.
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on September 24, 2015, 04:05:41 PM
Warren East talking about ARM at Said:

https://www.youtube.com/watch?v=5shqHs2GgFQ
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on September 24, 2015, 05:03:28 PM
Will the fall in jet fuel prices hurt purchases of new planes?

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=EER_EPJK_PF4_RGC_DPG&f=M

I think it has the opposite effect? With lower fuel price, airlines have more cashflow and are more willing to spend on capex to buy newer planes.

Hmm... wait, but i think these days many planes are leased from 3rd party lessors, not bought...

Title: Re: RR - Rolls-Royce
Post by: Patmo on September 24, 2015, 05:17:16 PM
Hard land would be temporary. World progress is only going one way over the long term.

Optimists. That's what I like.

Salute.

He does have 6 figures, possibly 7 figures worth of years to back him up though. It'll take a big one to go the other way
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on September 28, 2015, 09:19:44 AM
Quote
The San Francisco-based firm's most recent stake is a 5.5 percent holding in British aerospace group Rolls-Royce Holdings Plc. The letter laid out ValueAct's investment thesis, which stated that Rolls-Royce's civil aerospace business may be weighing on the company but has substantial long-term value.

"Our core new investment (in Rolls-Royce) epitomizes a company taking maximum short-term pain, delivering an increasing number of engines at a loss, while putting in place an aftermarket revenue stream that should yield tremendous cash and profits over twenty years," the letter states.

ValueAct is less excited about the company's non-aerospace business, which includes a nuclear division and the manufacturing of engines for land, sea and rail. The letter gave a strong hint that ValueAct would encourage the sale of this business.

"We do not model much recovery in the non-aerospace business, but believe there is portfolio value for the assets," the letter said.

Anyone have a copy of the ValueAct letter?
Title: Re: RR - Rolls-Royce
Post by: AJDelphi on October 01, 2015, 12:04:22 PM
I was thinking about the history of the Wide-Body industry today and hadn't seen any numbers pulled together on deliveries. Obviously future deliveries are a key to a Rolls Royce investment.

So I created a spreadsheet by Airplane Model and Manufacturer by year. Thought some on the board might find it useful. See attached.
Title: Re: RR - Rolls-Royce
Post by: Phaceliacapital on October 04, 2015, 11:19:00 PM
http://otp.investis.com/clients/uk/rolls-royce1/rns/regulatory-story.aspx?cid=171&newsid=578566

The number of employees will be reduced by up to 400 worldwide by the end of next year, in addition to the reduction of 600 employees previously announced in May, which was also driven by the impact of the low price of oil and subsequent fall in orders.

We expect the proposals will generate full year savings of £40m, with incremental benefits from 2016 onwards; most of the early savings will be invested in increased R&D activity. The cost of the programme was anticipated in the guidance provided in July, in which we set out that a further restructuring charge of up to £30m would be taken in the second half of the year. Due to the timing of actions being taken, this will now see £20m charged in 2015 and £10m taken in 2016
Title: Re: RR - Rolls-Royce
Post by: Picasso on October 05, 2015, 01:46:20 PM
http://www.marketfolly.com/2015/10/lone-pine-capital-increases-short.html
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on October 09, 2015, 09:03:17 PM
Ft: EU launches aircraft maintenance probe


https://next.ft.com/content/9b7a7434-6e9b-11e5-aca9-d87542bf8673?desktop=true
Title: Re: RR - Rolls-Royce
Post by: mateo999 on October 12, 2015, 11:30:59 AM
I've read through this thread, the annual report, countless conference calls, googled a whole bunch, etc. and can't find an answer.  Does TotalCare's rate per hour track an inflation measure?  Anyone privy to one of these contracts?
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on October 12, 2015, 03:59:04 PM
I've read through this thread, the annual report, countless conference calls, googled a whole bunch, etc. and can't find an answer.  Does TotalCare's rate per hour track an inflation measure?  Anyone privy to one of these contracts?

I asked their IR. They said "Long term service contracts generally include contractual inflationary index clauses".
Title: Re: RR - Rolls-Royce
Post by: mateo999 on October 12, 2015, 08:21:14 PM
Thanks
Title: Re: RR - Rolls-Royce
Post by: Picasso on October 14, 2015, 09:38:22 PM
http://www.bloomberg.com/news/articles/2015-10-14/boeing-plunges-as-delta-sees-bubble-of-used-wide-body-jets
Title: Re: RR - Rolls-Royce
Post by: Phaceliacapital on October 15, 2015, 01:48:24 AM
I believe most 777 current orders are fitted with GE90 engines...
Title: Re: RR - Rolls-Royce
Post by: rb on October 15, 2015, 09:46:01 AM
Indeed they are, and the future 777 will have only GE engines.

Also, I don't really see the premise of the article. It's not like the aircraft under lease are not flying. Why would there be a glut of planes once they come off lease?
Title: Re: RR - Rolls-Royce
Post by: jay21 on October 15, 2015, 09:51:59 AM
Indeed they are, and the future 777 will have only GE engines.

Also, I don't really see the premise of the article. It's not like the aircraft under lease are not flying. Why would there be a glut of planes once they come off lease?

Yeah - I didn't understand either but thought it was a lack of knowledge. Are people not renewing lease because of no demand or because they are trading in? It was unclear to me how this would affect future aircraft builds.
Title: Re: RR - Rolls-Royce
Post by: AJDelphi on October 15, 2015, 12:06:00 PM
I have been doing some thinking on this as well. If I remember correctly Delta tends to buy older aircraft as opposed to new, so Anderson's comments shouldn't be a big deal for future deliveries.

He doesn't specifically say it, but I wonder if Anderson is referring to the Used Wide-Body Aircraft market being in a bubble....I need to try and check but maybe Singapore Airlines is just purchasing new wide bodies, hence the availability of their 8-10 year old 777's.

Either way those engines are still going to be under service contracts. 

Here is the transcript from that question.

Michael Sasso - Bloomberg News
Good morning. Yes, I had there's kind of the rumor mill has been hot lately about Delta looking at some 777s coming out of Singapore. Can you just talk about that and is there any truth to that?

Richard Anderson - CEO
Yes, I'd be glad to. Well we're seeing a huge bubble in excess wide-body airplanes around the world and we've been approached by more than one party. I mean the market appears to be the 777-200s about 9 to 10 years old the price is about $10 million. And on A330-200 the lease rate is about a fifth of what it would be new.

So we do think that the aircraft market is going to be right for Delta and over the course of the next 12 to 36 months and we think that that weakness in that aircraft bubble in wide-bodies is going to spread to narrow-bodies and that there will be some huge buying opportunities because low interest rates really have created a huge wide-body bubble in the world.

Singapore Airlines, I think has 70 of these airplanes that are coming off lease or being retired that are 8 to 10 years old.
Title: Re: RR - Rolls-Royce
Post by: rb on October 15, 2015, 12:11:08 PM
Yea, all of this seems to point to Delta's strategy. Basically they're gonna buy older wide bodies and would have an older fleet and save some money. Buy for example if they buy 777s from Singapore then Singapore will buy new jets since they're not looking to cut routes. That doesn't really affect the engine market or the airframe market since I don't think anyone believed that those 777s would be retired after only 9 years.
Title: Re: RR - Rolls-Royce
Post by: AJDelphi on October 15, 2015, 12:17:46 PM
Singapore Airlines has 63 A350's on order from Airbus right now and 5 A380's. So 68 in total which pretty much explains the 777's that are coming to market and how they will be replaced. They have nothing on order from Boeing.

Towards the bottom of the page you can download the excel file for orders, deliveries, operators.
http://www.airbus.com/company/market/orders-deliveries/

Delta does have some new planes on order as well. So they aren't entirely just buying old aircraft.

32 A330's
25 A350's
18 787's (Dreamliner)
Title: Re: RR - Rolls-Royce
Post by: rb on October 15, 2015, 12:23:08 PM
And all of those birds will come with shiny new Trent engines :)
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on October 31, 2015, 07:03:04 AM
This is probably a dumb question but does anyone know where I can find disclosures on RR.L? I'm not that familiar with London stocks and I'm trying to dig deeper.
Title: Re: RR - Rolls-Royce
Post by: KJP on October 31, 2015, 07:14:45 AM
This is probably a dumb question but does anyone know where I can find disclosures on RR.L? I'm not that familiar with London stocks and I'm trying to dig deeper.

They are posted on the company's website and on the website of the London Stock Exchange.
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on October 31, 2015, 07:19:31 AM
This is probably a dumb question but does anyone know where I can find disclosures on RR.L? I'm not that familiar with London stocks and I'm trying to dig deeper.

They are posted on the company's website and on the website of the London Stock Exchange.

Ok, thanks. So there is no equivalent to the SEC reporting, or is all of that filed with the stock exchange?
Title: Re: RR - Rolls-Royce
Post by: xtreeq on October 31, 2015, 07:27:25 AM
This is probably a dumb question but does anyone know where I can find disclosures on RR.L? I'm not that familiar with London stocks and I'm trying to dig deeper.

I find this site useful
http://www.investegate.co.uk/CompData.aspx?code=RR.&tab=announcements
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on October 31, 2015, 07:31:23 AM
This is probably a dumb question but does anyone know where I can find disclosures on RR.L? I'm not that familiar with London stocks and I'm trying to dig deeper.

I find this site useful
http://www.investegate.co.uk/CompData.aspx?code=RR.&tab=announcements


Oh, that's nice. Thanks
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on October 31, 2015, 11:28:23 PM
I still have no idea how to handicap the EU regulatory risk.
Title: Re: RR - Rolls-Royce
Post by: rb on October 31, 2015, 11:41:43 PM
I still have no idea how to handicap the EU regulatory risk.
Do you know how to handicap any regulatory risk? If so please PM me cause I want to know how and I don't want anyone else to know  ;)
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on November 01, 2015, 09:03:27 PM
I still have no idea how to handicap the EU regulatory risk.
Do you know how to handicap any regulatory risk? If so please PM me cause I want to know how and I don't want anyone else to know  ;)

You assign not weight to the possibility that the regulator will rule their business model invalid? Not a fat-tail risk?

http://www.ft.com/intl/cms/s/0/9b7a7434-6e9b-11e5-aca9-d87542bf8673.html
http://www.reuters.com/article/2015/10/07/rolls-royce-trent-idUSL8N1270ML20151007
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on November 02, 2015, 04:43:30 AM
I still have no idea how to handicap the EU regulatory risk.
Do you know how to handicap any regulatory risk? If so please PM me cause I want to know how and I don't want anyone else to know  ;)

You assign not weight to the possibility that the regulator will rule their business model invalid? Not a fat-tail risk?

http://www.ft.com/intl/cms/s/0/9b7a7434-6e9b-11e5-aca9-d87542bf8673.html
http://www.reuters.com/article/2015/10/07/rolls-royce-trent-idUSL8N1270ML20151007

First thoughts:

I think it would be difficult for European regulators to do much to the business model. It looks like a big benefit for the total care contracts that RR sells is accounting: a sell with a TotalCare contract is booked as a gain under IFRS but a OE sale without it is booked as net £0. From what I can tell, it doesn't look like RR expects more money long term over this model (please correct me if I'm wrong!)

As for the availability of different engines for a single airframe, I'm not sure how a regulator can force this to change. It is certainly the bigger risk IMO, and I would guess it matters whether their has been collusion between OEMs (that would matter more in the US -- I know very little about antitrust and less still about European antitrust).

Title: Re: RR - Rolls-Royce
Post by: portfolio14 on November 02, 2015, 02:21:31 PM
I still have no idea how to handicap the EU regulatory risk.
Do you know how to handicap any regulatory risk? If so please PM me cause I want to know how and I don't want anyone else to know  ;)

You assign not weight to the possibility that the regulator will rule their business model invalid? Not a fat-tail risk?

http://www.ft.com/intl/cms/s/0/9b7a7434-6e9b-11e5-aca9-d87542bf8673.html
http://www.reuters.com/article/2015/10/07/rolls-royce-trent-idUSL8N1270ML20151007

First thoughts:

I think it would be difficult for European regulators to do much to the business model. It looks like a big benefit for the total care contracts that RR sells is accounting: a sell with a TotalCare contract is booked as a gain under IFRS but a OE sale without it is booked as net £0. From what I can tell, it doesn't look like RR expects more money long term over this model (please correct me if I'm wrong!)

As for the availability of different engines for a single airframe, I'm not sure how a regulator can force this to change. It is certainly the bigger risk IMO, and I would guess it matters whether their has been collusion between OEMs (that would matter more in the US -- I know very little about antitrust and less still about European antitrust).

I think you mix up 2 different issues: (1) linked contracts vs unlinked contracts; (2) TotalCare, RR's business model.

You are flying blind if you are long and have these key issues mixed up.
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on November 02, 2015, 02:48:28 PM
I still have no idea how to handicap the EU regulatory risk.
Do you know how to handicap any regulatory risk? If so please PM me cause I want to know how and I don't want anyone else to know  ;)

You assign not weight to the possibility that the regulator will rule their business model invalid? Not a fat-tail risk?

http://www.ft.com/intl/cms/s/0/9b7a7434-6e9b-11e5-aca9-d87542bf8673.html
http://www.reuters.com/article/2015/10/07/rolls-royce-trent-idUSL8N1270ML20151007

First thoughts:

I think it would be difficult for European regulators to do much to the business model. It looks like a big benefit for the total care contracts that RR sells is accounting: a sell with a TotalCare contract is booked as a gain under IFRS but a OE sale without it is booked as net £0. From what I can tell, it doesn't look like RR expects more money long term over this model (please correct me if I'm wrong!)

As for the availability of different engines for a single airframe, I'm not sure how a regulator can force this to change. It is certainly the bigger risk IMO, and I would guess it matters whether their has been collusion between OEMs (that would matter more in the US -- I know very little about antitrust and less still about European antitrust).

I think you mix up 2 different issues: (1) linked contracts vs unlinked contracts; (2) TotalCare, RR's business model.

You are flying blind if you are long and have these key issues mixed up.

Okay, so that's not needed.

My understanding of antitrust (which, to be clear, is cursory) is that linked TotalCare agreements would be the problem, specifically, the sales pressure to have airlines sign TotalCare agreements. That would be my read of "forced into anticompetitive contracts". We might guess that unlinked TotalCare agreements are fine, as they are negotiated separately, and that T&M is very okay. Without TotalCare, RR stills makes money on T&M, but they can't book any of those profits at time of sale except for the "contractual aftermarket rights", which is basically accounting goodwill so they don't take a loss on the sale.

I can't tell (so far?) how much more profitable TotalCare is over T&M but I can tell that linked TotalCare allows them to recognize positive revenue on a sale. If an antitrust investigation becomes focused on linked TotalCare contracts, then aside from whatever penalties RR has to pay, it's unclear to me how much, if at all, cash flow would be effected. If regulators find broader issues with the business model, then the consequences would obviously be worse.
Title: Re: RR - Rolls-Royce
Post by: ZenaidaMacroura on November 12, 2015, 03:58:41 AM
So valueact and sequoia are not having much fun outside of VRX either:

http://www.bloomberg.com/news/articles/2015-11-12/rolls-royce-says-2016-profit-to-be-hit-by-990-million-headwind

Roll Royce shares down some 20% -putting in a new low.
Title: Re: RR - Rolls-Royce
Post by: Grey512 on November 12, 2015, 04:19:11 AM
Looks interesting here..

Upside
: If you exclude the past 2 years (which were a disaster), the average annual unlevered FCF over the past business cycle is around 720m Pounds, and the annual top-line growth was 8%. Stick a 22x multiple on that unlevered FCF and you get to an EV of 16 billion Pounds and market cap in the same area, so that's a big upside from the current price of 10 billion. 60% upside.

Downside: But then again, this kind of a bumpy business... Who knows whether the turnaround is doable. What if the "normalized" unlevered FCF is 500m Pounds? (if you include the last 2 years, which are really bad, it averages out at around 440m Pounds over the past 12 years). What if the forward growth rate is 4% and not 8%? Put an 16x multiple on that 500m and you get to 8 billion EV and market cap, or 20% downside from today.

So this looks kinda asymmetric. Could be bumpy but I am tempted. The CEO's track record at ARM also looked good, but I wonder what % of that is his skill and what % of that is a secular sector tailwind during his time there.

Everything at a price..
Title: Re: RR - Rolls-Royce
Post by: petec on November 12, 2015, 04:44:39 AM
Stick a 22x multiple on that unlevered FCF


How do you get to that multiple, may I ask?
Title: Re: RR - Rolls-Royce
Post by: Grey512 on November 12, 2015, 05:28:24 AM
petec - totally finger in the air. No real work done, as of yet.

E.g. if (upon completion of the turnaround, say in 2017) RR can "sell" the vision of a defensible and visible 8% cash flow growth to the markets, the markets then could reward the company by valuing it at a 4-5% cash flow yield. Someone believing in that growth, if they turn out to be right, will see a decent forward equity return (8% growth + 4.5% current yield + couple of points due to leverage, i.e. north of 12%).
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on November 12, 2015, 07:10:03 AM

Upside
: If you exclude the past 2 years (which were a disaster), the average annual unlevered FCF over the past business cycle is around 720m Pounds, and the annual top-line growth was 8%. Stick a 22x multiple on that unlevered FCF and you get to an EV of 16 billion Pounds and market cap in the same area, so that's a big upside from the current price of 10 billion. 60% upside.

Unfortunately, FCF isn't a useful way to value this business given the timing mismatch between revenue and costs. You have very large upfront costs that will pay off over the next decade or two. The accounting earnings try to better match current costs with current expenses but are funky at best.

edit: See slide 24 in this presentation to see the timing mismatch:
http://www.rolls-royce.com/~/media/Files/R/Rolls-Royce/documents/investors/results/2015-interims-presentation.pdf
Title: Re: RR - Rolls-Royce
Post by: fareastwarriors on November 12, 2015, 07:23:43 AM
Who's buying?
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on November 12, 2015, 07:27:38 AM
Considering it. I'm also considering tax loss harvesting and then buying back.

They'll announce more details on the 24th, FYI. I'm not sure I want to trade ahead of that.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on November 12, 2015, 07:32:11 AM
Considering it. I'm also considering tax loss harvesting and then buying back.

I sold half. May sell the rest and buy back at year-end.
Title: Re: RR - Rolls-Royce
Post by: muscleman on November 12, 2015, 07:50:35 AM
Are there anybody good at valuing life insurance companies? I felt like the way RR report earnings is more like a life-insurance company. You have long term contracts with lots of assumptions about life span and you twist the estimates a bit and get a quite different earnings number for this year. What's the best way to tackle it?
Title: Re: RR - Rolls-Royce
Post by: handycap5 on November 12, 2015, 07:51:18 AM
can people following this industry help me understand something. what is going on between the OEMs, the engine guys, the after-market, etc.?

BA/AIR have very long backlogs and appear to have reasonable pricing power (though hard to tell), and this is across narrow and wide bodies. At the same time, many supply chain players seem to be having difficulty over last year: PCP, RR, WAIR, etc.

This is a quote from RR CFO on the call today:
In terms of the downside risk on legacy off the market portfolio is, I mean, we've modeled that and look to that as possibly as we can. But there clearly is a big transition going on both in the narrow-body and the wide-body side of the business and I think that we are not alone in experiencing this. I've seen comments from several other companies like from the airline side and the supply side within the industry over the last few weeks. And I think what we are seeing is part of a pattern and that may will change further and we got to be prepared.

What is he referring to? What is happening in this business that is different than the past?
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on November 12, 2015, 08:05:15 AM
I haven't listened to the call, but it sounds like there is a glut of older planes. Everyone ordered new planes when oil prices were high. Now they are taking delivery of the new jets but don't have traffic demand to keep older jets busy.

If true, this is very worrisome. Maybe aerospace really is in a bubble.
Title: Re: RR - Rolls-Royce
Post by: Picasso on November 12, 2015, 08:14:16 AM
That ties into the airline comments made earlier in the year about a bubble in used planes. I thought posters here said it wasn't a big deal for Rolls?
Title: Re: RR - Rolls-Royce
Post by: handycap5 on November 12, 2015, 08:54:09 AM
That ties into the airline comments made earlier in the year about a bubble in used planes. I thought posters here said it wasn't a big deal for Rolls?

thanks for the comments - let's keep going on it. i think the answer is more nuanced than this. first, load factors are at all-time highs. second, the OEM backlogs appear very firm.

has the aircraft fleet cost-supply curve shifted up (in spite of cheaper kerosene) so there are more planes being parked? are new planes that much more effiecient than the last many years? if the engine guys are the primary reason for the increased efficiency, why is their business struggling so much? did they misprice the razor-razorblade model (CFO of RR on the call said engines still last 25 years, but I question this)? how is it possible there is such a disparity between RR and GE's widebody engine business? will the engine guys try to renegotiate their deals with the OEMs (they do have exclusives!)?
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on November 12, 2015, 04:57:20 PM
I sold a few shares to harvest tax losses. I am pretty convinced that RR is a good business, but we may indeed be going into a dos cycle, potentially caused by lower fuel prices, hat make operating older aircraft economical.

I don't really know, but my rule is to sell, if fundamental move against my position much more so than expected, and that is certainly he case with RYCEY.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on November 12, 2015, 05:21:13 PM
I sold out. The business has is clearly in worse shape than I thought.
Title: Re: RR - Rolls-Royce
Post by: fareastwarriors on November 12, 2015, 05:21:59 PM
Do you think this is a good buy-out target?
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on November 12, 2015, 05:51:12 PM
Yes, but the UK owns a golden share and the natural bidders would spark antitrust concerns. A takeover seems obvious but not easy.
Title: Re: RR - Rolls-Royce
Post by: jay21 on November 13, 2015, 06:05:45 PM
Evolving thoughts, links, and snippets:

Latest CC:

"We are seeing significant changes in some of our end markets. It is primarily lower demand within corporate and regional markets, and reduced utilisation of older wide-body jets. We’re also seeing continued and more severe deterioration in the offshore Marine part of our business."

"We’ve set out in the statement and outlined on the slide the key factors that we see providing the
challenges for the coming year. £650 million headline figure comprises £300 million which we identified
in July; in particular, relating to the impact of the slowdown in the Trent 700 order book. I’d note that we
believe our initial estimation of this impact remains absolutely valid today. The next component is
£100 million in corporate and regional jets. That’s because we’re seeing further weakness in the
demand for business jet engines, in particular for new orders, as well as further weakening in demand
for aftermarket services for the smaller 50–70-seat regional aircraft.

Then, in our large engine business, we have between £100–150 million of headwind. We’re seeing
good growth in installed thrust, but that’s being offset by some short-term weakness on older,
wide-bodied programmes. And this is where our engines are being temporarily parked up, as some
people in the industry manage a transition to newer and more efficient aircraft. Finally, there’s between
£75–100 million of further headwinds in the Marine part of our business, where the market in offshore in
particular continues to weaken both for original equipment sales and for services.

So the profit effects are really quite dramatic, but the impact on cash flow is a lot less. And the reason
for that is the non-cash nature of the TotalCare accounting adjustments in both 2015 and 2016. And
there’s a difference where those adjustments are much more significant in 2015 than they are in 2016.
And there’s an expected benefit in 2016 of improved working capital as well."

J21: Issues primarily relate to legacy engine and non-core assets. I think the thesis rests primarily with new generation engines. Also, management needs to be very clear on the non-cash impact. How could these slowdowns not impact cash flow? It appears WC might offset negative drags?

"Now, we’ve given a 2017 view just in terms of saying that, you know, we expect the impact of some
these new changes that we’re announcing to impact in 2017. It’s too early to talk about the impacts of
the parked-up aeroplanes on 2017. Some of this – you know, it’s a very select number of airlines that
are involved at the moment. Some of them are – they’re basically balancing capacity and demand, and
there’s new, more efficient aeroplanes out there, and those planes are being bought to increase
capacity. Meanwhile demand wobbled slightly, and so the obvious thing to do is park up the less
efficient engines, and use the planes with more efficient engines. I think it won’t be – it’s really too early
to say, you know, is it a temporary effect that will be over and done with by 2017? In the long term the
demand is certainly there, so we do expect to see the overall number of aeroplanes being used
continue to increase.
And so I suspect that it is temporary, and that it is going to be a progressive
recovery, but it’s really a bit too early to say, ‘This will all be complete by 2017.’"

"In terms of long-term margins: no, I’m still very confident about that. That’s driven – as I hinted in the
last answer about the long-term growth in the installed base for the new Trent engines, that will
generate significant improvements in cash flow and operating margins and return on capital, over time.
I think we’re talking about the transition effects on the legacy programmes primarily, here.
"

"In terms of the downside risk on the legacy aftermarket portfolios: we’ve modelled that and looked at
that as closely as we can, but there clearly is a big transition going on both in the narrow-body and the
wide-body side of the business
. And I think that we are not alone in experiencing this; I’ve seen
comments from several other companies, both on the airline side and the supplier side within the
industry over the last few weeks, and I think what we’re seeing is part of a pattern. And that may well
change further, and we’ve got to be prepared, as Warren said, for that, and therefore more resilient to
those sort of fluctuations; that’s really why we’re taking the action that we’re taking."

J21: I see a fair amount of color on narrow body. What wide body weakness is out there?

"Streamlining senior management, simply so as if you’re going to be doing different things then, you
know, maybe senior managers will end up doing different things and maybe we won’t need quite so
many people."

J21: Execs should be nervous
Title: Re: RR - Rolls-Royce
Post by: jay21 on November 13, 2015, 06:26:58 PM
Rockwell Collins forecasts lower biz jet revenues: http://aviationweek.com/business-aviation/rockwell-collins-expect-weak-market-business-aviation-2016

Color on Rolls Royce and Bombardier: http://business.financialpost.com/news/rolls-royce-profit-warning-signals-broader-weakening-in-aircraft-demand

JPM Note:

"Aftermarket showing signs of weakness but not across the board. Given the
size of its aftermarket business (~$12 bn for Pratt and UTAS) the guide down at
UTX dominated this reporting season. Some of this was company-specific but
not all with COL (N) guiding down as well, along with MTU in Europe. We
have seen ups and downs in the aftermarket since the destock/restock cycle that
accompanied the recession and it is not wholly surprising that demand is
choppier with so many new aircraft being delivered, potentially crowding out
spares and maintenance for older planes. Based on anecdotal evidence, our
concerns for the aftermarket revolve around increased supply of some types of
spares, perhaps from retired aircraft or players in the secondary market, and
airline and MRO efforts to thin out inventories. Not all of the aftermarket was
weak, with robust growth in spares for newer narrowbody engines, including
33% y/y commercial spares growth at GE and 38% at Safran propulsion, both
driven by CFM56, as well as Pratt, where V2500 spares were up 30%+."

"Commercial aircraft demand remains solid. Amid weakness in the aftermarket
and concerns about business jets, commercial OE was steady, with Boeing and
Airbus each confident in planned rate increases. In addition, annualized 1H15
cancellations were only 1% of the Boeing and Airbus backlog, suggesting that
airlines are not responding to lower oil prices by canceling new aircraft to fly older
ones longer. In fact, far from signs of weakness, Airbus indicated that demand is
sufficient to boost A320 production above the planned rate of 50/month (perhaps to
~60) with supply chain capacity being the pacing item.
We have expressed
ambivalence about higher production rates, given that they heighten overproduction
risk and could inspire more skepticism of the cycle but the fact that they
are on the table suggests there is little in the near term to derail new aircraft
demand. OE strength is consistent with our OW ratings on BA and SPR. OE is the
key end market driver for each, with stock specific catalysts as well: in Boeing’s
case, this is improving 787 cash flow; for SPR, there is continued operational
improvement and capital deployment."
Title: Re: RR - Rolls-Royce
Post by: Picasso on November 13, 2015, 11:14:07 PM
I can see how Rolls shows half the margins of GE. It looks like their production line is stuck back in the 1990's.

You also have a town built around Rolls. Sort of hard to cut jobs or make big organizational changes.

Kind of funny to look back and see people on the board make fun of my comments back then.  Then we get these comments from the CEO:

Quote
The company is also burdened by costs from inefficient “legacy” production facilities, which will at least disappear when Rolls-Royce is able to eliminate older programs and machinery over the next few years, he said.

or this which sounds like code for lots of people doing things very inefficiently:

Quote
“We’ve just built up loads of processes here over the years,” East, who took over in July, said by telephone Friday. “They’ve all been added to, one on top of another on top of another, and it’s time to clean it up a bit. Our speed of reaction to changes in the market is not good enough.”

Anyway not to make fun of anyone but you really could tell a lot from that YouTube video posted earlier in the thread.
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on November 14, 2015, 01:37:00 AM
J21: Issues primarily relate to legacy engine and non-core assets. I think the thesis rests primarily with new generation engines. Also, management needs to be very clear on the non-cash impact. How could these slowdowns not impact cash flow? It appears WC might offset negative drags?

"Now, we’ve given a 2017 view just in terms of saying that, you know, we expect the impact of some
these new changes that we’re announcing to impact in 2017. It’s too early to talk about the impacts of
the parked-up aeroplanes on 2017. Some of this – you know, it’s a very select number of airlines that
are involved at the moment. Some of them are – they’re basically balancing capacity and demand, and
there’s new, more efficient aeroplanes out there, and those planes are being bought to increase
capacity.

This talk about "legacy" vs "new" sounds like smoke and mirrors. RR's aftermarket revenue is proportional to total thrust x flying hours and the difference between old and new engines shouldn't be material. So, in a nutshell, aircraft utilisation has gone down because there is currently an oversupply. Saying it's "legacy" just makes it sound like it's a problem inherited from past. Naughty mgmt.

Quote
Meanwhile demand wobbled slightly, and so the obvious thing to do is park up the less
efficient engines, and use the planes with more efficient engines. I think it won’t be – it’s really too early
to say, you know, is it a temporary effect that will be over and done with by 2017? In the long term the
demand is certainly there, so we do expect to see the overall number of aeroplanes being used
continue to increase.[/b] And so I suspect that it is temporary, and that it is going to be a progressive
recovery, but it’s really a bit too early to say, ‘This will all be complete by 2017.’"

After the Paris incident, the temporary-ness may stretch to years...
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on November 14, 2015, 03:48:32 AM
--Jay

I think the crux of the thesis is that long-term, the wide body market will grow. You're right that on the conference call it wasn't clear how much the wide-body market was effected, though the mention of some aircraft being parked is troubling.  If the revenue/profit drop of is largely due to linked vs unlinked sales, then whatever, but I'm not sure what to make of the parked aircraft bit.

I suspect that cash-flow from changes in working capital will have to do with a draw down of inventory, but that's a guess based on previous initiatives. Its not surprising that cash flow is less effected then revenue/profit, as their accounting brings forward revenue recognition from future periods of time (though, it seems it understates economic value). The cash flow stuff is good news, though, b/c it means they aren't in danger of bankruptcy.
 
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on November 14, 2015, 04:40:31 AM
The legacy versus new distinction is important. RR is expected to have a larger share of the wide body market on the new programs. I think you would prefer the airlines to park old planes than cancel new orders.
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on November 14, 2015, 05:06:53 AM
The legacy versus new distinction is important. RR is expected to have a larger share of the wide body market on the new programs. I think you would prefer the airlines to park old planes than cancel new orders.

That's a good point but it is is also important to note that the thesis (well, mine at least) is predicated not only on increasing share of the wide body market, but also its overall growth in size. Parked aircraft would be relevant to that.
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on November 14, 2015, 07:07:37 AM
The legacy versus new distinction is important. RR is expected to have a larger share of the wide body market on the new programs. I think you would prefer the airlines to park old planes than cancel new orders.

That's a good point but it is is also important to note that the thesis (well, mine at least) is predicated not only on increasing share of the wide body market, but also its overall growth in size. Parked aircraft would be relevant to that.

Both are good points.
Title: Re: RR - Rolls-Royce
Post by: jay21 on November 14, 2015, 09:24:16 AM
To synthesize the legacy issue:

Right now Rolls engines are going through a refresh led by the two new Airbus launches. However, they have some engines that are not being produced anymore but they are making aftermarket profits.

What happened is Rolls is not participating in new biz jets. This segment has experienced the biggest headwind recently. So the old jets were parked, which led to decreased aftermarket revenue on legacy jets. However, the new jets were being flown because they are more fuel efficient, which is why GE was able to show a decent quarter because they a presence in the new jets.

They key is still getting the new wide body jets up and running. I don't think that part of thesis has changed. It's "demand choppiness" right now.
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on November 14, 2015, 03:35:52 PM
To synthesize the legacy issue:

Right now Rolls engines are going through a refresh led by the two new Airbus launches. However, they have some engines that are not being produced anymore but they are making aftermarket profits.

What happened is Rolls is not participating in new biz jets. This segment has experienced the biggest headwind recently. So the old jets were parked, which led to decreased aftermarket revenue on legacy jets. However, the new jets were being flown because they are more fuel efficient, which is why GE was able to show a decent quarter because they a presence in the new jets.

They key is still getting the new wide body jets up and running. I don't think that part of thesis has changed. It's "demand choppiness" right now.

jay21, not biz jets. From the script:

"Then, in our large engine business, we have between £100–150 million of headwind. We’re seeing
good growth in installed thrust, but that’s being offset by some short-term weakness on older,
wide-bodied programmes
. And this is where our engines are being temporarily parked up, as some
people in the industry manage a transition to newer and more efficient aircraft."
Title: Re: RR - Rolls-Royce
Post by: jay21 on November 14, 2015, 06:00:05 PM
I guess it's both because right before they mentioned biz jets.  I have seen more color on the biz side. Time to check UTX and GE.

"The next component is
£100 million in corporate and regional jets. That’s because we’re seeing further weakness in the
demand for business jet engines, in particular for new orders, as well as further weakening in demand
for aftermarket services for the smaller 50–70-seat regional aircraft."
Title: Re: RR - Rolls-Royce
Post by: portfolio14 on November 14, 2015, 08:15:39 PM
I guess it's both because right before they mentioned biz jets.  I have seen more color on the biz side. Time to check UTX and GE.

"The next component is
£100 million in corporate and regional jets. That’s because we’re seeing further weakness in the
demand for business jet engines, in particular for new orders, as well as further weakening in demand
for aftermarket services for the smaller 50–70-seat regional aircraft."

Fair enough.
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on November 14, 2015, 08:23:56 PM
I guess it's both because right before they mentioned biz jets.  I have seen more color on the biz side. Time to check UTX and GE.

"The next component is
£100 million in corporate and regional jets. That’s because we’re seeing further weakness in the
demand for business jet engines, in particular for new orders, as well as further weakening in demand
for aftermarket services for the smaller 50–70-seat regional aircraft."

I sold my UTX on the day RYCEY released their bad news. Something is clearly happening in the aircraft industry and it does not look good.
Title: Re: RR - Rolls-Royce
Post by: handycap5 on November 16, 2015, 05:59:57 AM

I sold my UTX on the day RYCEY released their bad news. Something is clearly happening in the aircraft industry and it does not look good.

what is clearly happening in the aircraft industry, in your view?

1) load factors are at all time highs. I would be surprised if the Asians and all the rest of us stopped traveling: http://www.iata.org/publications/economics/Pages/Air-Passenger-Monthly-Analysis.aspx
2) OEMs have unusally long backlogs.

what confuses me is the parking of old 777's given lower oil prices and high load factors...
Title: Re: RR - Rolls-Royce
Post by: jay21 on November 16, 2015, 06:09:19 AM

I sold my UTX on the day RYCEY released their bad news. Something is clearly happening in the aircraft industry and it does not look good.

what is clearly happening in the aircraft industry, in your view?

1) load factors are at all time highs. I would be surprised if the Asians and all the rest of us stopped traveling: http://www.iata.org/publications/economics/Pages/Air-Passenger-Monthly-Analysis.aspx
2) OEMs have unusally long backlogs.

what confuses me is the parking of old 777's given lower oil prices and high load factors...

It's more the choppiness of what's going on. After a cursory glance, UTX and RR posted disappointing legacy service results. But GE seemed to do fine on their legacy business.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on November 16, 2015, 06:11:54 AM
Yes, this is the confusing part. The demand for used wide bodies should be high given the current backlog at the OEMs and the low oil prices. One of the main buyers of wide bodies is the Gulf countries. Given the low oil prices, maybe that is the source of the weakness?
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on November 16, 2015, 06:29:50 PM
Yes, this is the confusing part. The demand for used wide bodies should be high given the current backlog at the OEMs and the low oil prices. One of the main buyers of wide bodies is the Gulf countries. Given the low oil prices, maybe that is the source of the weakness?

I think the lower crude prices have a lot to do with the weakness. Newer airplanes with newer engines are more fuel efficient, but with kerosine prices down 60%, who cares. It's cheaper to fly the old birds that are mostly depreciated. While RR may have a huge backlog, the customer still can push out deliveries in many cases (at least that is what usually happens in these cases, where the customer ordered something , but does not really need it when it's build).

Some or RR's problems are certainly homemade, but since many other companies in aerospace have weak numbers, I think there is more to it.
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on November 16, 2015, 06:47:11 PM
Yes, this is the confusing part. The demand for used wide bodies should be high given the current backlog at the OEMs and the low oil prices. One of the main buyers of wide bodies is the Gulf countries. Given the low oil prices, maybe that is the source of the weakness?

I think the lower crude prices have a lot to do with the weakness. Newer airplanes with newer engines are more fuel efficient, but with kerosine prices down 60%, who cares. It's cheaper to flee the old birds that are mostly depreciated. While RR may have a huge backlog, the customer still can push out deliveries in many cases (at least that is what usually happens in these cases, where the customer ordered something , but does not really need it when it's build).

Some or RR's problems are certainly homemade, but since many other companies in aerospace have weak numbers, I think there is more to it.

I think this is backwards -- older planes generate higher service revenue through T&M. Any plane on TotalCare that is parked won't generate service revenue as that is proportional to the hours flown, and many of the older aircraft may still have TotalCare agreements.

Also, the A350 program has been delayed due to delays with rollout on Airbus's side, not demand. Finnair, for example, has had to push back starting planned routes due to delays in delivery.
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on November 19, 2015, 06:38:48 AM
Value act increases stake:

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/12589186.html
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on November 19, 2015, 07:15:05 AM
Value act increases stake:

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/12589186.html

Looking at that form, it looks like only a 0.1% increase. For some reason, they bought just enough to cross the 10% threshold.

In the UK, "a special meeting can be called by shareholders with a 10% voting stake." Looks like they are either preparing for a fight or trying to get negotiating leverage.
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on November 19, 2015, 07:17:02 AM
Value act increases stake:

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/12589186.html

Looking at that form, it looks like only a 0.1% increase. For some reason, they bought just enough to cross the 10% threshold.

In the UK, "a special meeting can be called by shareholders with a 10% voting stake." Looks like they are either preparing for a fight or trying to get negotiating leverage.

That's just what put them over the line for the filing. They've roughly doubled their stake.
Title: Re: RR - Rolls-Royce
Post by: AJDelphi on November 19, 2015, 07:24:39 AM
Value act increases stake:

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/12589186.html

Looking at that form, it looks like only a 0.1% increase. For some reason, they bought just enough to cross the 10% threshold.

In the UK, "a special meeting can be called by shareholders with a 10% voting stake." Looks like they are either preparing for a fight or trying to get negotiating leverage.

That's just what put them over the line for the filing. They've roughly doubled their stake.

Care to share how you know that?
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on November 19, 2015, 07:27:28 AM
Value act increases stake:

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/12589186.html

Looking at that form, it looks like only a 0.1% increase. For some reason, they bought just enough to cross the 10% threshold.

In the UK, "a special meeting can be called by shareholders with a 10% voting stake." Looks like they are either preparing for a fight or trying to get negotiating leverage.

That's just what put them over the line for the filing. They've roughly doubled their stake.

Care to share how you know that?

sure:

http://www.ft.com/intl/cms/s/0/2806e91c-8ec4-11e5-a549-b89a1dfede9b.html#axzz3rrurJK5B

http://www.bloomberg.com/news/articles/2015-07-31/rolls-royce-says-activist-fund-valueact-becomes-biggest-investor
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on November 19, 2015, 07:34:20 AM
That's just what put them over the line for the filing. They've roughly doubled their stake.

Makes sense. The last reporting trigger in July was 5% so you are correct. We just don't know when they doubled the position.

http://www.telegraph.co.uk/finance/newsbysector/industry/12005482/Activist-investor-ValueAct-takes-Rolls-Royce-stake-to-over-10pc.html

I'm not sure why they are resisting the ValueAct board seat.

Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on November 19, 2015, 08:16:16 AM
That's just what put them over the line for the filing. They've roughly doubled their stake.

Makes sense. The last reporting trigger in July was 5% so you are correct. We just don't know when they doubled the position.

http://www.telegraph.co.uk/finance/newsbysector/industry/12005482/Activist-investor-ValueAct-takes-Rolls-Royce-stake-to-over-10pc.html

I'm not sure why they are resisting the ValueAct board seat.

Hard to say what goes on behind the scenes. Still, ValueAct could be a positive for the company without a board seat and RR is talking to them (I remember a quote along the lines of "they're [ValueAct] asking a lot of good questions" but I can remember the source)
Title: Re: RR - Rolls-Royce
Post by: Grey512 on November 23, 2015, 03:45:56 AM
I've thought a bit more about RR and decided this verges between "not attractive" and "too hard". Reasons:

In the short run: this may head lower. In a nutshell: RR trades at 8x EBIT; the average over the past 10 yrs was 9x EBIT. In an '08-type scenario this easily gets cut in half to 5x EBIT.  Yes, the markets do get that crazy.

In the long run:
 - at current prices, I would rather add to PayPal or just remain in cash
 - I get the sense that US-style activists are finding it tougher to execute in the UK. The culture is a little different.
 - ValueAct / Ubben previously stated that they are attracted to businesses that sell some form of 'value-add' or 'process' and tend to shy away from industrials. This is a little bit close to that line. I also have not yet found any precedents of ValueAct successfully turning around a heavy industrials business of this type
 - RR. went from $1.5b of net cash in 2008 to $0.5b of net debt in 2015. I have some slight doubts about how cash generative this business can be, even if all the stars line up and management engages in some 3G-style zero-based budgeting. Not all sectors are made the same. In a consumer/brand oriented environment, cost-cutting may work. In mission-critical engines & servicing? Dunno.

In any case: kudos to Lone Pine and whoever else was short this year. Perhaps some of you will make some money being long - good luck, just too difficult for me.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on November 23, 2015, 04:41:25 AM
Grey, I think this should be in the too hard pile for most, but I am not convinced by your reasoning. Especially, your thoughts on ValueAct. They do have a great track record with industrials (dresser-rand 47% CAGR, gardner denver 50% CAGR according to ValueWalk). They also got 20% CAGR out of rockwell collins, which is an aerospace company.

Importantly, Ubben used to be an aerospace analyst, so he knows this industry well.

--
Correction: Ubben used to run the fidelity aerospace fund
Title: Re: RR - Rolls-Royce
Post by: Grey512 on November 23, 2015, 05:15:41 AM
KCLarkin,

Thanks. Slightly embarassed - had no idea that they backed Rockwell Collins. Was under clear impression that they try to stay away from tangible products and focus on intangibles.

If ValueAct are really good at aerospace then that does change my views from "unattractive"/"too hard" to "too hard". For those who have invested in Rockwell Collins / other ValueAct industrial plays and are familiar with what the story was there, RR probably a great name to look into; could be my loss. It's just difficult for me to get a handle on where the value is going to be extracted here. Labor? Suppliers? Clients? Inefficient capital structure? (assuming RR does not or cannot sell the marine division at a reasonable price; cycle-wise, this is the worst time to sell that division).
Title: Re: RR - Rolls-Royce
Post by: jay21 on November 23, 2015, 07:14:19 AM
Too hard?

Key drivers:

- Backlog durability / future deliveries
- Non Core Assets -> dispose or not?
- Productivity improvements -> benchmark to GE

I think you can get a good sense of those. Is there going to be inherent issues due to the migration to new models? Sure. But if you are sure of deliveries (and there is some risk there), then they are going to start generating good chunks of cash.
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on November 23, 2015, 06:08:49 PM
http://valuewalkposts.tumblr.com/post/133812525654/jeff-ubben-sees-value-in-rolls-royce-despite
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on November 23, 2015, 07:25:07 PM
http://valuewalkposts.tumblr.com/post/133812525654/jeff-ubben-sees-value-in-rolls-royce-despite

Thanks! Pretty good summary of the thesis. This is why I consider it too hard for many:
Quote
This is where ValueAct sees value. The deteriorating fundamentals of Rolls-Royce’s non-core businesses, combined with the complex accounting in aerospace has caused analysts and investors to abandon the company, despite the robust (and improving) fundamentals of the core aerospace division.

It will take a couple years for those fundamentals to really shine through. I sold for the tax loss, but plan to buy back in a couple weeks.
Title: Re: RR - Rolls-Royce
Post by: phil_Buffett on November 26, 2015, 01:15:27 AM
http://www.gwinvestors.com/wp-content/uploads/RR-LN-Perfect-Storm-November-2015.pdf

update from gw Investors

rolls royce the perfect storm.
Title: Re: RR - Rolls-Royce
Post by: rogermunibond on November 26, 2015, 04:54:20 AM
Isn't it funny how the "perfect storm" which was something that Junger described as an every 50-100 years event in North Atlantic meteorological terms is used for rather more frequent business blowups.  Really funny.

RR wasn't a perfect storm it was a couple decades of sailing with tailwinds leading to sloth, inefficiency and complacency.  It wasn't toppled by a "perfect storm."  It was toppled by a pretty regular storm.
Title: Re: RR - Rolls-Royce
Post by: fareastwarriors on November 30, 2015, 09:58:25 AM
Was this posted already? Looks like Sequoia Fund added big last quarter.

http://www.dataroma.com/m/hist/hist.php?f=SEQUX&s=RYCEF (http://www.dataroma.com/m/hist/hist.php?f=SEQUX&s=RYCEF)
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on December 02, 2015, 05:49:18 AM
http://aviationweek.com/mro/opinion-why-aftermarket-demand-not-tracking-airline-capacity
Title: Re: RR - Rolls-Royce
Post by: jay21 on December 05, 2015, 10:50:38 AM
Must watch lecture by East: https://www.youtube.com/watch?v=5shqHs2GgFQ

Anyone else have good articles/profiles on Warren and ARM?

Surprised this idea doesn't get more attention:

- Well regarded CEO
- Heavy ValueAct involvement
- Duopoly market
- Huge order book (but is it durable?)
- Low leverage

Lots to like on the surface but maybe too unpredictable with little visibility on future cash flows?
Title: Re: RR - Rolls-Royce
Post by: Jurgis on December 07, 2015, 09:59:46 AM
Must watch lecture by East: https://www.youtube.com/watch?v=5shqHs2GgFQ

Anyone else have good articles/profiles on Warren and ARM?

Surprised this idea doesn't get more attention:

- Well regarded CEO
- Heavy ValueAct involvement
- Duopoly market
- Huge order book (but is it durable?)
- Low leverage

Lots to like on the surface but maybe too unpredictable with little visibility on future cash flows?

Too hard pile:
- Accounting for long term contracts and how they will work out.

Possible caveats (but I did not look into them because of the "too hard"):
- CEO is well regarded, but from another industry. He may not be great/cognizant the complexities of contracts in this industry. He may mess up.
- Bad cost control?
- Price pushes from customers?
- Cyclical top?

Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on December 08, 2015, 05:09:47 PM
Must watch lecture by East: https://www.youtube.com/watch?v=5shqHs2GgFQ

Anyone else have good articles/profiles on Warren and ARM?

Surprised this idea doesn't get more attention:

- Well regarded CEO
- Heavy ValueAct involvement
- Duopoly market
- Huge order book (but is it durable?)
- Low leverage

Lots to like on the surface but maybe too unpredictable with little visibility on future cash flows?

Too hard pile:
- Accounting for long term contracts and how they will work out.

Possible caveats (but I did not look into them because of the "too hard"):
- CEO is well regarded, but from another industry. He may not be great/cognizant the complexities of contracts in this industry. He may mess up.
- Bad cost control?
- Price pushes from customers?
- Cyclical top?

I'd also add that it could take years for the new engine programs or any operational improvements to show up in the financials. Also, it seems like there is a high likelihood for the cashflow to get worse before it gets better if they're ramping up engine sales in the near future. Then there's the issue of a low cash conversation (related) and growing intangible assets on the balance sheet (also related)? Likely dividend cut? Apparent management inability to predict near term cash flow or earnings?

In all honesty, we might be looking at 2018/19 before cash from service revenue is greater than the cash burn of engine sales. The accrual based earnings should turn around before that, but I'm guessing this looks like a "wait and see" type for a lot of investors.

That'd be my bear case, but I still think its pretty good

 
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on December 09, 2015, 12:54:35 PM
If you are a value investor in a UK company, you don't want to see Woodford selling:
https://woodfordfunds.com/engine-trouble/
Title: Re: RR - Rolls-Royce
Post by: ZenaidaMacroura on December 09, 2015, 11:30:55 PM
If you are a value investor in a UK company, you don't want to see Woodford selling:
https://woodfordfunds.com/engine-trouble/
The replies in the comment section are scathing  :o
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on December 10, 2015, 04:13:35 AM
I have sold my position in RR as well a short while ago, since I came to the conclusion that I don't really understand the economics of their business model too well. They are apparently running their business differently than their competitors - they are selling their engines cheaply (and possibly at a loss) , but with a maintenance contract attached that supposedly is profitable. They book a profit based on the perceived NPV of the maintenance contract. This is accrual accounting and means that cash will flow out with each engine sold, which will flow back to RR over the term of the maintenance contract (20 years or so). This means that cash flow and profits become disconnected and one needs to trust management that the accounting is correct, which is somewhat of a stretch, based on prior experience. This business model seems to be different than what competitors are doing, who apparently sell their business at a profit.
Now, we have the EU investigations into these maintenance contract and their legality, which could really throw a huge wrench into this, if these contract are going to be voided,nor even modified, I could see a huge write off in RR future.

All the above makes RR a fairly hard not to crack. This is not just a cyclical issue, or an issue where management has slipped up in an otherwise strong business, this is a case, where the whole business model that RR works with could be called into question, which huge implications for their balance sheet and future profitability.
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on December 13, 2015, 09:27:52 AM
Okay, so here's one way I'm thinking about valuing RR:

2014 Civil Aerospace (CA) revenue: 6,837 M GBP
3% growth for 2015
12% net operating margin in CA
20% Tax rate
Normalized after tax profits: 676 M GBP

Valuation (Annuity with 3% growth rate, 10% discount rate):
9,657 M GBP + any value for other lines of business.

Current market cap:
10,430 M GBP


I think it makes sense to think in terms of normalized profit around CA revenues. It's an IP based duopoly with a critical line of business and a diverse customer base, meaning it is hard for a single purchaser to dictate pricing terms or for new entrants. Structurally, sound management should be able to earn a descent profit here, and I'm calling that 12% (this is also consistent with past margins). Also, they have an order book that shows growth, so I think pricing in a small amount of growth seems reasonable to me.

I realize that embedded in this valuation is that you have management that can run the company reasonably profitably (its more what is the company worth under competent management vs what is the company worth now). That's an operational bet -- I've been impressed with Warren East and ValueAct so far but I can definitely understand someone else's skepticism. I'd appreciate any feedback.
Title: Re: RR - Rolls-Royce
Post by: jay21 on December 13, 2015, 11:13:55 AM
It's imprecise in terms of valuation. It probably should be PV of backlog plus PV of legacy as the minimum value (because they will add to the backlog over time presumably). The problem is there isnt too much visibility into those CFs.

This is a valuable business that will exist decades from now. The question is how valuable is it? And will management doing something somewhat smart in the near term to counteract drags? Not cutting the dividend and raising debt is questionable to me. And on the call, not giving clear timelines on when this becomes FCF positive was negative because it made me think they are much more tied to the cycle than I thought, which is proving to be a little unpredictable right now.

It's probably a question of price and I should work a little more on valuation here. It's just how do you get a sense of CF?

Edit: Interestingly enough this company has turned out to be very levered to oil. If we get a rebound there, we should see some businesses come back to life.
Title: Re: RR - Rolls-Royce
Post by: Picasso on December 13, 2015, 11:59:22 AM
I really don't like Rolls anymore.  I mentioned the impact of energy early in the thread and no one cared about it. I mentioned the inefficiencies and no one cared. I mentioned the Lone Pine short and no one cared. This is more about cloning Sequoia or ValueAct versus understanding the black box which is their business.  Maybe the sharp reduction in the share price has fixed some of those issues, I don't know.

I think ValueAct has a view that the energy downturn is cyclical given their exposure to BHI and HAL. I think they said as much recently but I can't recall the specifics. So if you are following ValueAct you have to agree from that angle as well.  This energy mess seems a lot more secular than cyclical to me but what do I know.... 

Greenwood put some good effort into their bull thesis but a lot of it has turned out to be wrong. Meanwhile GE looks best positioned to dominate in this space.

This is like owning AXP versus V. Funny how ValueAct is also in AXP....
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on December 13, 2015, 12:18:34 PM
It's imprecise in terms of valuation. It probably should be PV of backlog plus PV of legacy as the minimum value (because they will add to the backlog over time presumably). The problem is there isnt too much visibility into those CFs.

This is a valuable business that will exist decades from now. The question is how valuable is it? And will management doing something somewhat smart in the near term to counteract drags? Not cutting the dividend and raising debt is questionable to me. And on the call, not giving clear timelines on when this becomes FCF positive was negative because it made me think they are much more tied to the cycle than I thought, which is proving to be a little unpredictable right now.

It's probably a question of price and I should work a little more on valuation here. It's just how do you get a sense of CF?

Edit: Interestingly enough this company has turned out to be very levered to oil. If we get a rebound there, we should see some businesses come back to life.

All good points, thanks.

In terms of CF of the CA business -- its CF negative, now and the PV of the backlog is also negative on a CF basis. All of the accounting profit is pretty much a leap of faith that the service revenue will make it work out in the end. The other problem is that CA is really many business, the legacy lines are CF positive and the new lines are CF negative. Eyeballing it, they've typically paid out ~1/3 of their profits to shareholders, which seems fine/consistent for a company that is growing.

The thing is, b/c there isn't a good reference point on the CFs, it seems easy to wildly miss on the valuation. It also looks like that, given the state of their operations and competitive position, RR is under earning.
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on December 13, 2015, 12:31:51 PM
I really don't like Rolls anymore.  I mentioned the impact of energy early in the thread and no one cared about it. I mentioned the inefficiencies and no one cared. I mentioned the Lone Pine short and no one cared. This is more about cloning Sequoia or ValueAct versus understanding the black box which is their business.  Maybe the sharp reduction in the share price has fixed some of those issues, I don't know.

I think ValueAct has a view that the energy downturn is cyclical given their exposure to BHI and HAL. I think they said as much recently but I can't recall the specifics. So if you are following ValueAct you have to agree from that angle as well.  This energy mess seems a lot more secular than cyclical to me but what do I know.... 

Greenwood put some good effort into their bull thesis but a lot of it has turned out to be wrong. Meanwhile GE looks best positioned to dominate in this space.

This is like owning AXP versus V. Funny how ValueAct is also in AXP....

Yeah, the Greenwood thesis was ridiculous. I kinda like the inefficiencies and leverage to energy, though, b/c I view those as fixable problems and there is a new CEO and and activist. They don't have to grow users for a dying internet firm or get people to shop in a terrible old shopping mall, which I think are much harder problems.

Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on December 14, 2015, 04:57:50 AM
http://www.ft.com/intl/cms/s/0/41a4756a-a1a2-11e5-bc70-7ff6d4fd203a.html#axzz3uH45J9v8

Edit: another sources, with some independent reporting:
http://www.bbc.com/news/business-35094446
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on December 15, 2015, 03:28:12 PM
Management shake up:

http://www.ft.com/intl/cms/s/0/fafa429e-a349-11e5-8d70-42b68cfae6e4.html
http://www.ft.com/intl/cms/s/0/92311d22-a354-11e5-8d70-42b68cfae6e4.html
Title: Re: RR - Rolls-Royce
Post by: fareastwarriors on December 16, 2015, 08:46:11 AM
Management shake up:

http://www.ft.com/intl/cms/s/0/fafa429e-a349-11e5-8d70-42b68cfae6e4.html
http://www.ft.com/intl/cms/s/0/92311d22-a354-11e5-8d70-42b68cfae6e4.html

Rolls-Royce to Restructure Management in Cost-Cutting Drive
http://www.nytimes.com/2015/12/17/business/international/rolls-royce-to-restructure-management-in-cost-cutting-drive.html?ref=international&_r=0 (http://www.nytimes.com/2015/12/17/business/international/rolls-royce-to-restructure-management-in-cost-cutting-drive.html?ref=international&_r=0)
Title: Re: RR - Rolls-Royce
Post by: fareastwarriors on December 21, 2015, 01:02:29 PM
Management shake up:

http://www.ft.com/intl/cms/s/0/fafa429e-a349-11e5-8d70-42b68cfae6e4.html
http://www.ft.com/intl/cms/s/0/92311d22-a354-11e5-8d70-42b68cfae6e4.html

Rolls-Royce to Restructure Management in Cost-Cutting Drive
http://www.nytimes.com/2015/12/17/business/international/rolls-royce-to-restructure-management-in-cost-cutting-drive.html?ref=international&_r=0 (http://www.nytimes.com/2015/12/17/business/international/rolls-royce-to-restructure-management-in-cost-cutting-drive.html?ref=international&_r=0)


Rolls-Royce chief voices ‘disquiet’ over diesel engine business
http://www.ft.com/intl/cms/s/0/bc3650c8-a729-11e5-955c-1e1d6de94879.html#axzz3uzQhw0CC (http://www.ft.com/intl/cms/s/0/bc3650c8-a729-11e5-955c-1e1d6de94879.html#axzz3uzQhw0CC)


The bloom is off Rose’s legacy at Rolls-Royce
http://www.ft.com/intl/cms/s/0/6b861958-a56a-11e5-97e1-a754d5d9538c.html#axzz3uzQhw0CC (http://www.ft.com/intl/cms/s/0/6b861958-a56a-11e5-97e1-a754d5d9538c.html#axzz3uzQhw0CC)
Title: Re: RR - Rolls-Royce
Post by: muscleman on December 21, 2015, 10:29:42 PM
I really don't like Rolls anymore.  I mentioned the impact of energy early in the thread and no one cared about it. I mentioned the inefficiencies and no one cared. I mentioned the Lone Pine short and no one cared. This is more about cloning Sequoia or ValueAct versus understanding the black box which is their business.  Maybe the sharp reduction in the share price has fixed some of those issues, I don't know.

I think ValueAct has a view that the energy downturn is cyclical given their exposure to BHI and HAL. I think they said as much recently but I can't recall the specifics. So if you are following ValueAct you have to agree from that angle as well.  This energy mess seems a lot more secular than cyclical to me but what do I know.... 

Greenwood put some good effort into their bull thesis but a lot of it has turned out to be wrong. Meanwhile GE looks best positioned to dominate in this space.

This is like owning AXP versus V. Funny how ValueAct is also in AXP....

Similar thoughts here. I never understood how great the total care contract economics are, and I can't understand GW's bull thesis.
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on February 12, 2016, 03:56:25 AM
Full Year results are out: http://www.rolls-royce.com/investors/results-centre/all-results-and-updates/yr-2015.aspx

I haven't looked at this in depth, but the big things that stand out to me are 1) positive FCF in 2015, 2) negative (but manageable) FCF projected for 2016, 3) dividend cut.

Seems pretty positive -- my biggest concern was they would need to do an equity raise at depressed prices to maintain an investment grade rating -- that seems off the table for now. Market seems to like the results, overall.
Title: Re: RR - Rolls-Royce
Post by: fareastwarriors on February 12, 2016, 10:23:25 AM
http://www.bloomberg.com/gadfly/articles/2016-02-12/rolls-royce-repair-job-only-half-the-story (http://www.bloomberg.com/gadfly/articles/2016-02-12/rolls-royce-repair-job-only-half-the-story)
Title: Re: RR - Rolls-Royce
Post by: Phaceliacapital on February 23, 2016, 02:04:52 AM
https://foragerfunds.com/bristlemouth/rolls-royce-and-the-pliable-nature-of-reporting/
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on March 04, 2016, 02:06:20 PM
http://www.thisismoney.co.uk/money/markets/article-3475478/Rolls-Royce-s-new-everyman-boss-shuns-outrageous-perks-past-shaming-predecessor-austere-approach.html
Title: Re: RR - Rolls-Royce
Post by: fareastwarriors on May 20, 2016, 08:42:04 AM
Bribe inquiry highlights Rolls-Royce’s cultural challenge

http://www.ft.com/intl/cms/s/0/df5d21be-1d24-11e6-b286-cddde55ca122.html#axzz4929E5pJi (http://www.ft.com/intl/cms/s/0/df5d21be-1d24-11e6-b286-cddde55ca122.html#axzz4929E5pJi)
Title: Re: RR - Rolls-Royce
Post by: sleepydragon on May 21, 2016, 09:35:10 PM
hi guys, how come nobody is talking about their fx risk? Their 2015 reported profit is only 160 pounds. They have a huge 1 billion unrealized lose on their fx contract shorting dollar
Why they have such a huge fx risk? It seems the fx risk dominate this company's earning? Why nobody is talking about this? Thanks!
Title: Re: RR - Rolls-Royce
Post by: topofeaturellc on May 22, 2016, 08:19:21 AM
They structurally have a big FX mismatch between revenues and costs. The hedge book is them attempting to mitigate the risk.
Title: Re: RR - Rolls-Royce
Post by: sleepydragon on May 22, 2016, 09:50:37 AM
They structurally have a big FX mismatch between revenues and costs. The hedge book is them attempting to mitigate the risk.

Yes, i understand that. But the exposure is shocking. How come coke doesnt have such problem?
Maybe they shall just not hedge at all or maybe move their factory to US to natural hedge this. It seems they lost 1bn in 2014 and another 1bn in 2015 from their hedge book
Title: Re: RR - Rolls-Royce
Post by: rb on May 22, 2016, 10:00:12 AM
Coke doesn't have this problem is because they're way more currency diversified and Coke has tons of costs in the local currency where they sell. In the case of RR most of the sales are in USD and most of the costs are in GBP and the stock is in GBP. As the previous poster said. It's just a thing with this company.

In my opinion it's not that big a deal. But if you're really concerned about it you can reverse or modify the hedges on your own.
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on May 22, 2016, 10:23:15 AM
Just to add to rb's point, the economies the cost structure are very different than of coke. Engine development and manufacture have very high fixed costs with high complexity / low unit volume -- it makes sense to have a single factory for each specialized procedure/component in the manufacturing process. Coke is the other way around with low complexity / high unit volume -- having duplicate factories all over the world, like coke does, is not feasible.

Ultimately, RR is a British company with British shareholders and managers and was bailed out by the British government with British public funds. Their cost structure isn't going overseas. They do have facilities all over the world, and especially in the US, but hedging is their best option if they are agnostic to future currency price movements. And they *should* be agnostic to future currency price movements, as no one is paying the executive team to make currency bets. That went against them in 2014 and 2015, but 2016 looks better.

Overall, most of the accounting gains and losses are non-cash adjustments to the fair-value of derivative contracts. It's a fairly big derivates book (~29 Billion pounds) so these movements look meaningful. To the extent the derivatives book locks in a future known cost/gain in pounds vs dollars, fair value adjustments offset a future gain/loss from currency movements (assuming they've properly hedged).
Title: Re: RR - Rolls-Royce
Post by: sleepydragon on June 02, 2016, 04:24:54 PM
according to this page:
http://www.sequoiafund.com/FundComm.pdf

RR is in their top 10 holdings.
Does anyone remember seeing the last quarter's commentary? Was RR a top 10 holding back then? Or maybe they added?
Title: Re: RR - Rolls-Royce
Post by: rb on June 02, 2016, 04:53:06 PM
RR's been a top 10 holding for a long time
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on June 15, 2016, 01:30:28 PM
A350 deliveries are still behind:

http://www.ft.com/intl/cms/s/0/fcb9575a-31c9-11e6-ad39-3fee5ffe5b5b.html#axzz4Bep5iwO3

but see:
http://www.bloomberg.com/news/articles/2016-06-15/plane-seat-supplier-zodiac-jumps-as-airbus-a350-logjam-eases
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on July 28, 2016, 06:32:41 AM
I came across this:
Quote
Previously, Rolls-Royce has brought forward profits from long-term aftersales service contracts, to make up for the fact that many aero-engines are initially sold at a loss. Roughly 50 per cent of Rolls-Royce’s civil aerospace sales are generated by aftersales service contracts.

The new accounting rules come into force in 2018 and will specify how and when a company can recognise revenue from contracts. The group had previously suggested that it was too early to interpret how the rules would affect its business model, as they were still under discussion.

“The initial indication seems to be a much stricter interpretation [of the rules],” said Nick Cunningham, of Agency Partners. “That could have a bigger impact as it would mean waiting five-plus years from delivery of the lossmaking engine to booking the first after-market profits.”

Sandy Morris, of investment bank Jefferies, said the changes could have a “significant impact” on earnings.
http://www.ft.com/cms/s/0/311bbde4-549d-11e6-befd-2fc0c26b3c60.html


It's weird to me that an accounting for revenue recognition would be such a big deal to analysts. The revenue recognition process isn't new and the accounting change doesn't effect cash flow or the economics of the situation.
Title: Re: RR - Rolls-Royce
Post by: bbarberayr on September 02, 2016, 07:46:48 AM
From Sequoai's investor day, a recap of the story:

http://www.marketfolly.com/2016/08/ruane-cunniff-sequoia-fund-investor-day.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MarketFolly+%28Market+Folly%29
Title: Re: RR - Rolls-Royce
Post by: VersaillesinNY on November 02, 2016, 03:39:47 PM
How Rolls Royce Bribed Its Way Around the World - BBC Panorama documentary 10/31/16

https://www.youtube.com/watch?v=7_6WmL-Wno0

Quote
No big defense deal takes place without money changing hands, defense deals are big deals. Facility payment or commission, that's the way it works.
Title: Re: RR - Rolls-Royce
Post by: fareastwarriors on November 18, 2016, 08:15:43 AM
Emirates Says Rolls-Royce’s A380 Engines Not Up to Standard

http://www.bloomberg.com/news/articles/2016-11-18/emirates-says-rolls-royce-a380-engines-not-up-to-agreed-standard (http://www.bloomberg.com/news/articles/2016-11-18/emirates-says-rolls-royce-a380-engines-not-up-to-agreed-standard)
Title: Re: RR - Rolls-Royce
Post by: Scunny Bunny on November 18, 2016, 12:03:56 PM
Rolls Royce Capital markets dayvearlier this week. Go to their website for the forward outlook plus accounting ramifications of IFRS15 - fully explained with examples
Title: Re: RR - Rolls-Royce
Post by: sleepydragon on December 05, 2016, 08:53:01 PM
a few things: 1. I think you are only counting 1500 of Trent XWB engines, but there are other engines (Trent 1000, 700) etc. that are being sold. 2. it's 14 airplanes, so it's 28 engines, so per engine profit will actually be even less than your number, I guess? 3. The $580m revenue seems is for service contract only, which has very high profit margin. i think something like 50%. but they loss money on the engine, so the final margin is like 35%..


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.
Title: Re: RR - Rolls-Royce
Post by: VersaillesinNY on January 16, 2017, 11:45:34 AM
Rolls to Pay $807 Million to End U.K., U.S. Bribery Probes

https://www.bloomberg.com/news/articles/2017-01-16/rolls-royce-will-pay-807-million-in-settlement-of-bribery-cases

Quote
The British penalty is the biggest-ever sanction issued against a company by the U.K.
"It’s a very large fine which we didn’t see coming: it’s something of a bolt from the blue," said Nick Cunningham, an aerospace and defense equity analyst at Agency Partners in London. "Usually these settlements are relatively moderate compared to the size of the company."
Title: Re: RR - Rolls-Royce
Post by: fareastwarriors on February 14, 2017, 08:14:56 AM
Rolls-Royce Mulls Disposal of Weaker Units as Profit Falls
https://www.bloomberg.com/news/articles/2017-02-14/rolls-royce-profit-beats-estimates-on-cost-cuts-airbus-boost (https://www.bloomberg.com/news/articles/2017-02-14/rolls-royce-profit-beats-estimates-on-cost-cuts-airbus-boost)



Rolls Royce is Lost in the Fog
https://www.bloomberg.com/gadfly/articles/2017-02-14/rolls-royce-is-obscured-by-fog (https://www.bloomberg.com/gadfly/articles/2017-02-14/rolls-royce-is-obscured-by-fog)
Title: Re: RR - Rolls-Royce
Post by: sleepydragon on February 19, 2017, 09:59:46 AM
Goldman upgraded Rolls-Royce to Buy and Add to conviction list.
But be warned, I have noticed that Goldman's "Buy Conviction list" tend to have negative returns after announcements :)
Price target is 1030p

------------
Source of opportunity

We upgrade Rolls-Royce to Buy and add it to the Conviction List. Cash
performance at Rolls-Royce has been disappointing as underlying earnings
performance has fallen and the investment burden has risen. We believe the
diversified nature of the group and the impending accounting changes
warrant a cash flow based valuation approach. We expect company-defined
FCF to improve from £120 mn this year to £495 mn in 2018, £1,018 mn in
2019 and £1,547 mn in 2020. Our 12m price target of 1030p implies 55%
upside and an 8% FCFe yield in 2020; adding in the substantial (£985 mn) FX
benefit implied beyond 2020 would increase this to 12%.

Catalyst
Aside from 1H results (date TBC) the key catalyst will be program
performance, i.e., continued deliveries of Trent XWB on time and continued
in-service performance of the engine.

Valuation
Our 12m price target is now 1030p (from 743p). We value Rolls-Royce on
11.4x 2018E EV/DACF; our target multiple is based on our 2018E CROCI
forecast of 15.6% (+100 bp vs. our previous estimates) and assumes a 1:1
relationship between EV/GCI and CROCI/WACC. This compares to the
average target multiple of 11x for our coverage. In our view, a cash flow
and returns based valuation captures the underlying drivers of economic
value. Our previous multiple was 12.1x, which was based on a 2x premium
to Rolls-Royce’s historical average EV/DACF. We expect DACF (debt-adj.
cash flow) growth to outpace earnings; over 2016-20, we forecast an
underlying EBIT CAGR of 21% but improving cash conversion should result
in a DACF CAGR of 27%. Our EPS estimates for 2017/18 increase by 8%/6%

Key risks

1) FX, a weaker USD. 2) Negative momentum in defence markets, where
visibility is lower. 3) Further declines in sanctioned offshore capex. 4)
Program risk (Trent XWB, Trent 1000). 5) US Tax reform.


Title: Re: RR - Rolls-Royce
Post by: xtreeq on February 19, 2017, 10:15:44 AM
When did they publish the upgrade?
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on February 19, 2017, 10:23:06 AM
Anyone know what caused the drop on Friday? The Fitch downgrade?
Title: Re: RR - Rolls-Royce
Post by: sleepydragon on February 19, 2017, 10:31:30 AM
When did they publish the upgrade?

today or yesterday.
Title: Re: RR - Rolls-Royce
Post by: sleepydragon on February 19, 2017, 10:35:09 AM
Anyone know what caused the drop on Friday? The Fitch downgrade?

I think since they reported ER, it has been selling off everydat.
The headline earning is awful, but it's mostly from accounting loss on the hedging and one time bribery settlement.
I actually feeling better about RR now after listening to Mungers comments about deferring etc..
Title: Re: RR - Rolls-Royce
Post by: zizou on October 01, 2017, 05:49:24 AM
https://www.reuters.com/article/us-air-france-canada/air-france-flight-with-engine-damage-makes-emergency-landing-in-canada-idUSKCN1C50PV

Scary pictures from this Air France engine failure.

"The aircraft involved in the incident was an Airbus 380 that was about seven years old, according to airfleets.net, an aircraft database. The engine was made by Engine Alliance, a joint venture between General Electric Co and United Technologies Corp’s Pratt & Whitney unit."
Title: Re: RR - Rolls-Royce
Post by: fareastwarriors on January 12, 2018, 11:39:21 AM
Rolls-Royce Seeks $700 Million From L'Orange Arm Sale

https://www.bloomberg.com/news/articles/2018-01-12/rolls-royce-is-said-to-seek-700-million-from-l-orange-arm-sale (https://www.bloomberg.com/news/articles/2018-01-12/rolls-royce-is-said-to-seek-700-million-from-l-orange-arm-sale)
Title: Re: RR - Rolls-Royce
Post by: fareastwarriors on February 06, 2018, 08:00:56 AM
GE Engine Venture May Oust Rolls From Emirates A380 Contract
https://www.bloomberg.com/news/articles/2018-01-22/ge-engine-venture-may-oust-rolls-from-emirates-a380-contract (https://www.bloomberg.com/news/articles/2018-01-22/ge-engine-venture-may-oust-rolls-from-emirates-a380-contract)
Title: Re: RR - Rolls-Royce
Post by: no_free_lunch on March 10, 2018, 07:13:04 PM
Earnings came out a few days ago. Still weak but improving. Looking ahead they are talking 450m pounds fcf this year and 1b fcf in 2020.  However the target fcf seems fully priced in relative to 17b market cap.  Anyone see value here?


https://www.bloomberg.com/news/articles/2018-03-07/rolls-royce-to-deepen-restructuring-following-earnings-surge
Title: Re: RR - Rolls-Royce
Post by: rb on March 10, 2018, 07:42:22 PM
Yes. FCF is depressed as new programs are ramping up. Right now that depression is pretty bad and likely to last for a while as they have a lot of orders coming to be filled. But it won't last forever and when it normalizes it will do so in a powerful way.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on March 11, 2018, 10:42:41 AM
Earnings came out a few days ago. Still weak but improving. Looking ahead they are talking 450m pounds fcf this year and 1b fcf in 2020.  However the target fcf seems fully priced in relative to 17b market cap.  Anyone see value here?


https://www.bloomberg.com/news/articles/2018-03-07/rolls-royce-to-deepen-restructuring-following-earnings-surge

I struggle with this one. I have a small position.

RR trades at a little over 1x sales. That seems super-cheap for a duopoly player in a growing, R&D intensive, highly regulated industry. Obviously, margins and FCF and very poor for many reasons. You'd hope that the new CEO would be able to significantly increase margins and cash flow, which would make the current price attractive. But you are already paying for significant improvement.
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on April 11, 2019, 04:28:54 AM
Looking at this one too  and have been for a while. It‘s  trading around 1.1x sales (~15GBP revenue) and their largest business (civil aerospace engines) responsible for almost half the revenues is still losing money. balance sheet looks Ok, but there are LT customer commitments and pension issues.

The turnaround is taking years and the Trent 1000 issues and cost to fix seem to be getting worse. It’s an interesting business, but the two top players in it GE and Rolls Royce are both struggling for different reasons. No position.

https://www.rolls-royce.com/~/media/Files/R/Rolls-Royce/documents/annual-report/2018/2018-full-annual-report.pdf (https://www.rolls-royce.com/~/media/Files/R/Rolls-Royce/documents/annual-report/2018/2018-full-annual-report.pdf)
Title: Re: RR - Rolls-Royce
Post by: karthikpm on November 29, 2019, 06:04:18 AM
Steven Wood seems to like this a lot

https://www.gwinvestors.com/wp-content/uploads/RR-LN-Update-November-2019-Friend-Version-v2.pdf
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on November 29, 2019, 07:43:17 AM
Steven Wood seems to like this a lot

https://www.gwinvestors.com/wp-content/uploads/RR-LN-Update-November-2019-Friend-Version-v2.pdf

I bought some shares recently around 700p. My biggest concern is accounting. I am watching the cash flows closely and hope they make their 2019 forecast.
Title: Re: RR - Rolls-Royce
Post by: rogermunibond on November 29, 2019, 08:07:25 AM
This has been a tough turnaround for Warren East.  Three years plus and counting.

The bulls have been arguing for the installed engine base service cash tsunami that's coming but so far....
Title: Re: RR - Rolls-Royce
Post by: karthikpm on November 29, 2019, 08:12:24 AM
Does it trade in decent volumes in the US ADR ? or better to buy on LSE ?
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on November 29, 2019, 10:30:05 AM
Does it trade in decent volumes in the US ADR ? or better to buy on LSE ?

Volume seems plenty (200k/ day per yahoo finance) and bid ask I soften down to a penny or two.

The cash tsunami from service seems like it’s pushed out further and further in the future. They lose money on the problematic Trent engines X1000 Nd a recent credit downgrade is a problem too. They can’t really afford to go non- investment grade and probably would have to raise equity via a rights offering in this case. That’s my biggest concern.
Title: Re: RR - Rolls-Royce
Post by: sleepydragon on November 29, 2019, 11:26:35 AM
Belong to the too difficult box
Title: Re: RR - Rolls-Royce
Post by: sleepydragon on November 29, 2019, 11:28:55 AM
Does it trade in decent volumes in the US ADR ? or better to buy on LSE ?

Volume seems plenty (200k/ day per yahoo finance) and bid ask I soften down to a penny or two.

The cash tsunami from service seems like it’s pushed out further and further in the future. They lose money on the problematic Trent engines X1000 Nd a recent credit downgrade is a problem too. They can’t really afford to go non- investment grade and probably would have to raise equity via a rights offering in this case. That’s my biggest concern.

And they make money from servicing these engines, which used to be very reliable and long life.
Now the new engines are under incredible stress and who knows how long they can last.
Title: Re: RR - Rolls-Royce
Post by: ValuePadawan on November 30, 2019, 11:33:37 AM
https://youtu.be/EDvl8qR08Cg?t=3726

Anyone have any thoughts on how even a soft brexit might impact RR supply chains?
Title: Re: RR - Rolls-Royce
Post by: banellie on November 30, 2019, 11:55:28 PM
https://youtu.be/EDvl8qR08Cg?t=3726

Anyone have any thoughts on how even a soft brexit might impact RR supply chains?

At the bottom of page 11 and page 15, this report gets into the implications of Brexit, however, it is worth reading it in its entirety in my opinion.

https://www.gwinvestors.com/wp-content/uploads/RR-LN-Update-November-2019-Friend-Version-v2.pdf
Title: Re: RR - Rolls-Royce
Post by: ValuePadawan on December 01, 2019, 12:21:21 PM
Wow I thoroughly enjoyed the writeup thanks!
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on December 01, 2019, 04:59:28 PM
Wow I thoroughly enjoyed the writeup thanks!

I second this. I do find it strange that  nobody mentions the doomsday scenario:

1) continued weak cash flows cause a credit downgrade to near junk
2) due to customers getting uneasy about RR.L meeting their LT obligation after above, RR decides to do a deeply discounted rights offering
That would cause dilution at the bottom (foreign ADR holders for sure couldn’t participate and would get screwed) and permanent loss of capital.
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on December 10, 2019, 03:34:38 AM
Valueact leaving the board - shares down 3%+.
 https://finance.yahoo.com/news/1-rolls-royce-says-valueact-084809104.html (https://finance.yahoo.com/news/1-rolls-royce-says-valueact-084809104.html)

Probably got tired waiting for the turnaround after 4 years and do some housecleaning for next year. They own a substantial position, so if they sell, it could put further pressure on the stock.
Title: Re: RR - Rolls-Royce
Post by: ValuePadawan on December 10, 2019, 06:19:30 AM
I wonder what they are seeing at the board level that is making them wave the white flag. With XWB starting to hit the maintenance schedule I'm expecting cash flows to increase and if they can cut costs and reduce headcount by the end of 202o like they are saying they will it seems like odd timing to say the least.
Title: Re: RR - Rolls-Royce
Post by: buffetteer1984 on December 10, 2019, 07:08:36 AM
Could be tax loss selling for valueact.  It's interesting that they would be doing this as the stock is near a low very similar to their investment in ADS.
Title: Re: RR - Rolls-Royce
Post by: ValuePadawan on December 10, 2019, 07:35:29 AM
Ya it could be. There are many reasons to sell but only one to buy.
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on January 12, 2020, 06:19:24 AM
The stock has trended down (after the Valueact representative left the board and they presumable started to sell down their position) and I have added a bit to my position,  it don’t have the cojones to make this a major bet. they will announce their 2019 results on February 28 and so far every earnings announcement has been an disappointment. I am particularly concerned about the FCF numbers , as those were very weak for the half year results and I think rating agencies have them under the microscope.

Then there is concern about further deterioration of the Trent 1000 and of course any news with problem with the Trent XWB engine (their largest program) would be a killer.

That said, this trades at 0.8x revenues and if they can turn this around, it should beantworte  at least 2x the still growing revenues at some point. So I think we are looking st least at a 2 bagger plus organic growth if they turn this around. Also the Boeing woes are a tailwind for RR, since they are sole supplier for the A350 and their largest product. The A350 is the main competitor to Boeing’s 737 max and I expect it will do very well.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on January 12, 2020, 08:11:08 AM
A350 is competitor to 787 not 737. RR only sells wide body engines.
Title: Re: RR - Rolls-Royce
Post by: ValuePadawan on January 12, 2020, 12:46:41 PM
Spekulatius I too will be watching the cash flow numbers closely in addition to keeping an eye on whether they are making their numbers in terms of headcount and restructuring as well as reducing R&D spend and if their inventory starts to come down back to regular levels now that the Brexit path is more certain.


As a bit of a tangent I was reading they are looking into the hybridization of widebody engines by the 2030's or so.

This seems crazy to me based on current battery technologies.

The batteries in a Tesla have an energy density of around 240 Wh/kg. The batteries that are being researched right now might have an energy density of 280-300 Wh/kg.

Kerosene has an energy density of around 14,000 Wh/Kg.

Even if jet engines are only 35-40% efficient in terms of kinetic energy Fig. 3.2(https://www.nap.edu/read/23490/chapter/6#37) and somehow electric jet engines somehow get to double that efficiency as they have with automobiles.

They would still need more than 20kg of batteries to replace 1 kg of kerosene. This doesn't even get into the cost of the batteries or their lifespan it just doesn't seem technically feasible to electrify or even hybridize aviation at all in the next decade.

Does anyone know why Rolls are pursuing hybridization? Is it for the PR to keep environmentalists satisfied or am I making a mistake and missing a crucial piece of the electronic aviation puzzle?
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on January 12, 2020, 01:00:35 PM
Spekulatius I too will be watching the cash flow numbers closely in addition to keeping an eye on whether they are making their numbers in terms of headcount and restructuring as well as reducing R&D spend and if their inventory starts to come down back to regular levels now that the Brexit path is more certain.


As a bit of a tangent I was reading they are looking into the hybridization of widebody engines by the 2030's or so.

This seems crazy to me based on current battery technologies.

The batteries in a Tesla have an energy density of around 240 Wh/kg. The batteries that are being researched right now might have an energy density of 280-300 Wh/kg.

Kerosene has an energy density of around 14,000 Wh/Kg.

Even if jet engines are only 35-40% efficient in terms of kinetic energy Fig. 3.2(https://www.nap.edu/read/23490/chapter/6#37) and somehow electric jet engines somehow get to double that efficiency as they have with automobiles.

They would still need more than 20kg of batteries to replace 1 kg of kerosene. This doesn't even get into the cost of the batteries or their lifespan it just doesn't seem technically feasible to electrify or even hybridize aviation at all in the next decade.

Does anyone know why Rolls are pursuing hybridization? Is it for the PR to keep environmentalists satisfied or am I making a mistake and missing a crucial piece of the electronic aviation puzzle?

I think part of the answer for the battery may be that that peak power is only needed during takeoff or in emergencies, so maybe not much stored energy is needed if a hybrid tech is used. Otherwise it’s correct that the power density of batteries is way too low to completely replace kerosene powered jet engines.

Kclarkin is correct that the A350 is a competitor to the larger 787 and not the 737 max. In any case, they are not affected by the 737 max disaster, unlike GE potentially.
Title: Re: RR - Rolls-Royce
Post by: SharperDingaan on January 12, 2020, 01:14:28 PM
You might want to ask yourself WHY you are willing to take on the ongoing turn-around risk AS WELL AS the disruption, from the coming Brexit. Most would be looking at a temporary exit until after the dust settles.

SD
Title: Re: RR - Rolls-Royce
Post by: Xerxes on January 12, 2020, 02:16:57 PM
Great discussion folks:

i ll just throw in few qualitative points for the sake of discussion:

Aside the development issues RR has had, there has been a few strategic headwinds in recent years. (1) They lost the business jet position with Gulfstream to P&WC early in the decade, (2) they sold their stake in IAE to P&W and effectively removed themselves from the narrow body segment, which is now the absolute place to be (3) they got impacted by Bombardier drop in Global production rate on the legacy aircraft (4) there has been softness in the wide-body market and that is looking like more and more a permanent structural change.

On (1) & (3), RR has been working hard to get back into the game (i.e. note the brand new Gulfstream G700 + Global 5500/6500); on (2) P&W and CFM are well trenched in for the long haul; On (4) the wide-body softness looks more and more like a structural change. With the introduction of the likes of Airbus A.321LR, the upper segment of that narrow-body category is making the lower end of wide-body very vulnerable. (dont believe Boeing MOM will happen either) On a positive side, RR has A.350 and A.330NEO to itself.

Consolidation:

I believe in the long term RR needs scale. Note that Honeywell, future Raytheon Technologies and GE all have market capitalization north of $100B whereas Rolls Royce has a market cap of ~$13B. I cannot believe that with all the consolidation happening in the A&D sector, RR will not be participating as a target.

I dont believe Raytheon Technologies will be a buyer given where they are now with Raytheon about to be folded in (that said P&W is very complementary to RR from a product segment point of view); it would definitely not be GE (given their financial troubles and more importantly a GE-RR tie-up would mean a virtual monopoly in the wide-body segment). That leaves Honeywell or other PE-like shop as potential buyers.





Title: Re: RR - Rolls-Royce
Post by: Jurgis on January 12, 2020, 02:23:48 PM
That leaves Honeywell or other PE-like shop as potential buyers.

Berkshire.  ;)
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on January 12, 2020, 05:39:33 PM
I don’t think Brexit is a huge risk, as it is in both the EU (Airbus) and the UK‘s interest to keep the supply chain intact.

As for getting acquired, one has to consider that RR is a strategic asset for Britain and the government has a veto in important matters via a golden share. So, I don’t think that an acquisition by PE is in the cards.

My big concern is that in the case RR‘s future looks financially shaky, the government is going to facilitate a capital raise and doing what’s best for the UK, shareholder value be damned.
Title: Re: RR - Rolls-Royce
Post by: ValuePadawan on January 12, 2020, 06:08:41 PM
My big concern is that in the case RR‘s future looks financially shaky, the government is going to facilitate a capital raise and doing what’s best for the UK, shareholder value be damned.

What would cause such a shaky financial future? The only thing I can think of is massive problems with the Trent XWB engine and so far as I know that engine hasn't shown any of the problems the Trent 1000 has and it has been in use for over 5 years by now if there was a problem we would know about it.
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on January 12, 2020, 06:58:50 PM
My big concern is that in the case RR‘s future looks financially shaky, the government is going to facilitate a capital raise and doing what’s best for the UK, shareholder value be damned.

What would cause such a shaky financial future? The only thing I can think of is massive problems with the Trent XWB engine and so far as I know that engine hasn't shown any of the problems the Trent 1000 has and it has been in use for over 5 years by now if there was a problem we would know about it.

 https://industryeurope.com/rolls-royce-downgraded-to-triple-b-minus-one-notch-above-junk/ (https://industryeurope.com/rolls-royce-downgraded-to-triple-b-minus-one-notch-above-junk/)

RR is barely investment grade with a BBB- rating. Because of thr long term nature of its service contracts, it is likely that customer would get nervous if RR credit fell into junk and that might well trigger a capital raise. They need to get their house in order with respect to FCF - the H1 2019 results were Ok operationally, but there was a huge cash outflow which supposedly will be reversed in H2. If that is not the case, I think we have an issue with the credit rating and I may well exit immediately since it could become very ugly for her equity. Some of this might be priced in, but I don’t think all off it. Anyway, one want to be close to the door if someone yells fire.
Title: Re: RR - Rolls-Royce
Post by: Xerxes on January 12, 2020, 07:28:08 PM
Couple years back, ARM Holding (another crown jewel) was picked up by SoftBank right after the Referendum.
The British Gov authorized it on strict assurances that SoftBank would be adding more jobs. And i believe in the past few years, SoftBank has kept its words and re-invested ARM Holding's earning back into England and created more jobs.   

I think if something comes on that front in regards to RR, it will be with the British Government explicit OK.
Few years ago, British Gov was desperate to sell BAE to Airbus before Germany scuttled the deal, i am sure with BREXIT, the British Gov would see some merit in terms of having RR scale and under a stewardship of say larger company so that it can re-invest for the future.

Question is who will be to Rolls Royce, what Onex was to West-Jet?
of course it is all speculation on my side. 
Title: Re: RR - Rolls-Royce
Post by: ValuePadawan on January 12, 2020, 08:04:55 PM

 https://industryeurope.com/rolls-royce-downgraded-to-triple-b-minus-one-notch-above-junk/ (https://industryeurope.com/rolls-royce-downgraded-to-triple-b-minus-one-notch-above-junk/)

RR is barely investment grade with a BBB- rating. Because of the long term nature of its service contracts, it is likely that customer would get nervous if RR credit fell into junk and that might well trigger a capital raise. They need to get their house in order with respect to FCF - the H1 2019 results were Ok operationally, but there was a huge cash outflow which supposedly will be reversed in H2. If that is not the case, I think we have an issue with the credit rating and I may well exit immediately since it could become very ugly for her equity. Some of this might be priced in, but I don’t think all office. Anyway, one want to be close to the door if someone yells fire.

Interesting, well its another thing to keep an eye on in regards to the cash in the business I see that as unlikely but worth keeping an eye on.
Title: Re: RR - Rolls-Royce
Post by: SharperDingaan on January 13, 2020, 08:20:32 AM
I don’t think Brexit is a huge risk, as it is in both the EU (Airbus) and the UK‘s interest to keep the supply chain intact.

As for getting acquired, one has to consider that RR is a strategic asset for Britain and the government has a veto in important matters via a golden share. So, I don’t think that an acquisition by PE is in the cards.

My big concern is that in the case RR‘s future looks financially shaky, the government is going to facilitate a capital raise and doing what’s best for the UK, shareholder value be damned.

Re Brexit; think sterling devaluation post Brexit, not supply chain disruption.

SD
Title: Re: RR - Rolls-Royce
Post by: ValuePadawan on January 13, 2020, 08:43:20 AM

Re Brexit; think sterling devaluation post Brexit, not supply chain disruption.

SD

With a lot of their costs in pounds and revenue in US dollars I don't think that would be terrible.
Title: Re: RR - Rolls-Royce
Post by: NotSoWise on January 13, 2020, 09:05:07 AM
They have big hedging program. So not obvious how it will end... in the end.
Title: Re: RR - Rolls-Royce
Post by: SharperDingaan on January 13, 2020, 10:02:12 AM

Re Brexit; think sterling devaluation post Brexit, not supply chain disruption.

SD

With a lot of their costs in pounds and revenue in US dollars I don't think that would be terrible.

Think you're missing the point. Sell the shares today, put the proceeds into a USD T-Bill, let sterling devalue post Brexit. Sell the USD, get more sterling for it, & buy the shares back (hopefully at a lower price). Keep the FX difference and swing trade gain as profit. Nothing to do with what the company does.  ;)

SD
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on February 28, 2020, 04:15:00 AM
RR announced results today and they look pretty good. Lots of noise, but it seems like things are better with the Trent engine and most importantly, FCF was decent.
 https://otp.tools.investis.com/clients/uk/rolls-royce/rns/regulatory-story.aspx?newsid=1375472&cid=171 (https://otp.tools.investis.com/clients/uk/rolls-royce/rns/regulatory-story.aspx?newsid=1375472&cid=171)

Obviously a lot of noise around the aircraft industry right now, but this does look very very cheap, if they generate 1 GBP in FCF/share. Stock is up this AM, deservedly so.
Title: Re: RR - Rolls-Royce
Post by: kab60 on February 28, 2020, 04:24:42 AM
Agree, looks interesting. Also a bit on coronavirus/supply chains:

East said the coronavirus may hurt air-traffic growth in the near term but that long-term trends most affecting Rolls-Royce remain intact. Some suppliers in China did briefly close, but Rolls was able to rely on existing inventory, and those are now back up and running, he said.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on March 17, 2020, 06:59:48 AM
I sold my small position yesterday. I never got comfortable enough to make this a half position and should have sold years ago. I can't see a clear risk/reward now. Global air traffic should rebound in the next 18-24 months. But many of their customers may go bankrupt.
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on March 17, 2020, 07:51:25 AM
I sold my small position yesterday. I never got comfortable enough to make this a half position and should have sold years ago. I can't see a clear risk/reward now. Global air traffic should rebound in the next 18-24 months. But many of their customers may go bankrupt.

Sold as well today. I agree with your assessment, it’s too operationally leveraged. The service contracts get paid by flight hours and engine deliveries may be on hold. I think the stock to buy is Airbus, when this clears up a little.
Title: Re: RR - Rolls-Royce
Post by: Castanza on March 17, 2020, 07:56:53 AM
I sold my small position yesterday. I never got comfortable enough to make this a half position and should have sold years ago. I can't see a clear risk/reward now. Global air traffic should rebound in the next 18-24 months. But many of their customers may go bankrupt.

Sold as well today. I agree with your assessment, it’s too operationally leveraged. The service contracts get paid by flight hours and engine deliveries may be on hold. I think the stock to buy is Airbus, when this clears up a little.

I wonder how lenient Airbus will be with deliveries. I can picture a few airlines hoping to hold that ship at sea.
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on March 17, 2020, 09:03:54 AM
I sold my small position yesterday. I never got comfortable enough to make this a half position and should have sold years ago. I can't see a clear risk/reward now. Global air traffic should rebound in the next 18-24 months. But many of their customers may go bankrupt.

Sold as well today. I agree with your assessment, it’s too operationally leveraged. The service contracts get paid by flight hours and engine deliveries may be on hold. I think the stock to buy is Airbus, when this clears up a little.

I wonder how lenient Airbus will be with deliveries. I can picture a few airlines hoping to hold that ship at sea.

Yes, Airbus will be flexible. I can see that the 737 is tainted and airlines may not want it, even if the business picks up again and they again need planes. LUV in the longer term has a huge issue be sure they are a single aircraft (737) airline and the 737 max was their upgrade path. They are no so big, that they probably need to start buying from Airbus to diversify their risk.
Title: Re: RR - Rolls-Royce
Post by: Xerxes on March 17, 2020, 11:23:24 AM
Agreed
Ironically the one airline that had an all 737 Boeing fleet will likely be diversifying with Airbus (and most likely A220 given that the larger NEOs are sold off for years), the very same plane that they (Boeing) tried to wack when it used to be called C Series and ran it into the arms of Airbus for $1. 
Title: Re: RR - Rolls-Royce
Post by: Xerxes on April 01, 2020, 12:27:10 PM
I sold my small position yesterday. I never got comfortable enough to make this a half position and should have sold years ago. I can't see a clear risk/reward now. Global air traffic should rebound in the next 18-24 months. But many of their customers may go bankrupt.

Sold as well today. I agree with your assessment, it’s too operationally leveraged. The service contracts get paid by flight hours and engine deliveries may be on hold. I think the stock to buy is Airbus, when this clears up a little.

Congrats to both of you for selling. it is now 3$ or so. :-)
I kept mine; although was against it. it was such a small bet for me and now it is even smaller.
I ll just leave it there.

Title: Re: RR - Rolls-Royce
Post by: Xerxes on April 06, 2020, 05:51:23 AM
Dividend suspended.

This thing cannot survive on its own with its portfolio centered on wide body program and business jets. With wide body being in structural decline ...

And cannot be merged with GE due to anti trust reasons.
Title: Re: RR - Rolls-Royce
Post by: KCLarkin on April 06, 2020, 07:58:17 AM
Dividend suspended.

This thing cannot survive on its own with its portfolio centered on wide body program and business jets. With wide body being in structural decline ...

And cannot be merged with GE due to anti trust reasons.

Hmm. The press release seemed bullish to me.
Title: Re: RR - Rolls-Royce
Post by: ukvalueinvestment on April 06, 2020, 08:01:50 AM
Dividend suspended.

This thing cannot survive on its own with its portfolio centered on wide body program and business jets. With wide body being in structural decline ...

And cannot be merged with GE due to anti trust reasons.

Hmm. The press release seemed bullish to me.

"structural decline" appears a very pessimistic way of putting it.  RR is part of a duopoly in the wide body market and there are maintenance based cashflows coming in for the next 20 years.  In addition, why would they want to merge with GE, who have their own set of issues?
Title: Re: RR - Rolls-Royce
Post by: Xerxes on April 06, 2020, 08:17:21 AM
sorry I should have not merged my own views with the press release.

I am not saying the company is going out of business. What I am saying is that in world were the narrow-body A.321 XLR is eating more and more into the middle of market segment, long term there is less demand for wide body aircraft (i.e. structural decline). This view is on the whole market not related to RR specifically, however given that RR has an outsized position in the wide body in its product portfolio as oppose to narrow body it will impact them much more than GE or P&W, both of which are part of greater businesses, and RR is not.

RR left the most lucrative part of the market (i.e. narrow body) years ago when it sold its stake in the JV back to P&W.

On the aircraft side, Boeing tried to do the impossible: to come up with a wide-body aircraft but with low economics of a narrow-body, to bridge the middle of market segment. There was never much confidence on that and now with new leadership in charge they are likely to work on shoring up their financials and fix their current issues.

I own both RTX and RR; but rather add to my RTX than add to RR.

Title: Re: RR - Rolls-Royce
Post by: Spekulatius on April 06, 2020, 04:26:04 PM
I sold this because I realized that RR may get into a cash squeeze. Their cash flows have been weak all along and their maintenance contracts are based on flying hours, which I am guessing went to near zero.

RR will not go bankruptcy. It is an strategic assets for the UK and the government own a golden share and will backstop them. I don’t think a backstop in Europe will be as painless than in the US. Governments in Europe do not shy away from taking control of a business. In the UK’ case, the most likely case is a capital raise that is backstopped by the government and will hand them effective control. It has happened before many decades (1970’s ?) ago , so it’s not without precedent at all
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on June 01, 2020, 04:12:52 AM
So, here we are - RR.L credit rating cut to junk (by 2 notches) to BB. Since they make their living on LT service do facts, that’s not going down well with customers. They probably will get some backstop from the UK government,  but there is no way to tell what it is going to cost for equity holders (UK holds a golden share in RR).

Europe isn’t like the US as far as bailouts are concerned, and bailouts often wipe out or impair equity.
 https://www.reuters.com/article/us-health-coronavirus-rolls-royce-hldg/sp-cuts-rolls-royce-credit-rating-to-junk-on-covid-19-hit-idUSKBN2343DB (https://www.reuters.com/article/us-health-coronavirus-rolls-royce-hldg/sp-cuts-rolls-royce-credit-rating-to-junk-on-covid-19-hit-idUSKBN2343DB)
Title: Re: RR - Rolls-Royce
Post by: TheAiGuy on June 01, 2020, 04:36:51 AM
So, here we are - RR.L credit rating cut to junk (by 2 notches) to BB. Since they make their living on LT service do facts, that’s not going down well with customers. They probably will get some backstop from the UK government,  but there is no way to tell what it is going to cost for equity holders (UK holds a golden share in RR).

Europe isn’t like the US as far as bailouts are concerned, and bailouts often wipe out or impair equity.
 https://www.reuters.com/article/us-health-coronavirus-rolls-royce-hldg/sp-cuts-rolls-royce-credit-rating-to-junk-on-covid-19-hit-idUSKBN2343DB (https://www.reuters.com/article/us-health-coronavirus-rolls-royce-hldg/sp-cuts-rolls-royce-credit-rating-to-junk-on-covid-19-hit-idUSKBN2343DB)

Yeah, so, aren’t all of their customers on the brink of failure?  What do we think the long-term survivability of GE is, say if American Airlines folds?

Normally, I would agree with you that the credit quality of RR really matters to it’s long term business prospects for the reason you state. But all of these companies are very close to bankruptcy, so I have a hard time seeing how RR’s credit rating, specifically, will impact its competitive position in the context of the pandemic.

Title: Re: RR - Rolls-Royce
Post by: sleepydragon on June 01, 2020, 05:48:38 AM
especially RR focus on making engines for wide body airlines -- long distance, a lot of passengers, low fuel consumption.. I imagine nobody order those airlines now.
Title: Re: RR - Rolls-Royce
Post by: ValuePadawan on June 01, 2020, 06:47:55 AM
So, here we are - RR.L credit rating cut to junk (by 2 notches) to BB. Since they make their living on LT service do facts, that’s not going down well with customers. They probably will get some backstop from the UK government,  but there is no way to tell what it is going to cost for equity holders (UK holds a golden share in RR).

Europe isn’t like the US as far as bailouts are concerned, and bailouts often wipe out or impair equity.
 https://www.reuters.com/article/us-health-coronavirus-rolls-royce-hldg/sp-cuts-rolls-royce-credit-rating-to-junk-on-covid-19-hit-idUSKBN2343DB (https://www.reuters.com/article/us-health-coronavirus-rolls-royce-hldg/sp-cuts-rolls-royce-credit-rating-to-junk-on-covid-19-hit-idUSKBN2343DB)

Hi Spek do you have a view on whether the power systems and defense segments will be able to keep Rolls afloat long enough for air travel to come back?
Title: Re: RR - Rolls-Royce
Post by: Xerxes on June 01, 2020, 02:17:28 PM
Folks, invest with consolidator … Raytheon Technologies not Rolls Royce.
Notwithstanding golden shares and such, Rolls Royce, a $10 billion business, with huge exposure in wide body MRO and business jet, would need scale to compete. It will get bought it. Golden shares didn't stop Rolls Royce Motor to go with BMW several decades ago.

Contrast that with Raytheon Technologies, a $100 billion business.
GE is nowhere close, not because of GE Aviation, but everything else that had gone wrong.

Unless, you are buying RR on the hope of it being acquired, Raytheon Technologies is the consolidator to go with.
its defense assets will catch the tailwind of hypersonic R&D, P&W will suffer short term but has the right mix and will be the consolidator and already has a hefty exposure to Pentagon (i.e. F135 engines), Collins Aerospace fiefdom is pretty diversified between Airbus and Boeing offerings.

Raytheon Technologies may have an income statement problem (like the rest of the industry), but it does not have balance sheet problem (like Boeing, GE or RR). In times like this, if you cannot expand your balance sheet to take advantage of the opportunities that means the company is not run by good capital allocator.

In case of RR, this is not Warren East' fault, and in case of GE, this is not Larry Culp's fault, both guys were dealt a bad hand.
Both businesses will survive but will not dominate.
Title: Re: RR - Rolls-Royce
Post by: rb on June 01, 2020, 02:50:28 PM
Folks, invest with consolidator … Raytheon Technologies not Rolls Royce.
Notwithstanding golden shares and such, Rolls Royce, a $10 billion business, with huge exposure in wide body MRO and business jet, would need scale to compete. It will get bought it. Golden shares didn't stop Rolls Royce Motor to go with BMW several decades ago.

Contrast that with Raytheon Technologies, a $100 billion business.
GE is nowhere close, not because of GE Aviation, but everything else that had gone wrong.

Unless, you are buying RR on the hope of it being acquired, Raytheon Technologies is the consolidator to go with.
its defense assets will catch the tailwind of hypersonic R&D, P&W will suffer short term but has the right mix and will be the consolidator and already has a hefty exposure to Pentagon (i.e. F135 engines), Collins Aerospace fiefdom is pretty diversified between Airbus and Boeing offerings.

Raytheon Technologies may have an income statement problem (like the rest of the industry), but it does not have balance sheet problem (like Boeing, GE or RR). In times like this, if you cannot expand your balance sheet to take advantage of the opportunities that means the company is not run by good capital allocator.

In case of RR, this is not Warren East' fault, and in case of GE, this is not Larry Culp's fault, both guys were dealt a bad hand.
Both businesses will survive but will not dominate.
Well the thing is that a lot of people in commercial aerospace are buying Pratt engines. So that sucks.

Rolls may be ok in a horrible, relative way if they don't go bk. They loose money on new engines but the spare parts business is highly profitable. So the mix will go higher margin with the new planes getting pushed back. It's not a lot but it's something.

If you're looking for alternatives I think that the best shop in the business is Safran. They have 1/2 of the GE narrow body business and a bunch of military/security stuff. They're nowhere close to overlevered either. While they stock price came down a lot, it's not what I would describe as cheap. But then neither is Raytheon or whatever is classed these days.
Title: Re: RR - Rolls-Royce
Post by: Xerxes on June 01, 2020, 03:20:25 PM
All engine manufacturers have more or less the same model.
Sell engines at or near cost, to plant the seeds, get the MRO stream for the life of the program.

This is not unique to RR.

Aircraft manufacturers though are typically different. Cash comes at delivery of the aircraft.
that is why Airbus and Boeing are so susceptible to production rate decrease and the cash flow gets hammered.

Engine manufactures still have a broad diversified revenue stream from all their platforms currently in operation even if their production rate gets hammered.
The only thing that can throw a monkey wrench into that model, is a black swan event that makes majority of aircraft being grounded cutting off the high margin cash flow from MRO. But I reckon going from a 95% aircraft grounded to 70% grounded is relatively fast, going from 70% to 45% will be slower, and lastly going from 45% to close to zero (or Dec 2019 level), will take years. So the A/M juice will start to flow again lifting the boats, but not at the same rate, with regional and narrow body first and lastly wide body.
Title: Re: RR - Rolls-Royce
Post by: rb on June 01, 2020, 03:30:48 PM
Yeah, but rolls was having some cash questions because their programs were pretty aggressive with deliveries (which were cash negative). Now that new deliveries dropped off the face of the map that helps. Yea the planes will fly less and that also squeezes the cash cow that is aftermarket. But I wasn't breaking out the champagne. It's just a silver lining because Rolls was the most commercial engine manufacturer exposed to new deliveries.
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on June 01, 2020, 03:46:39 PM
Rolls Royce will survive, but if current equity owners benefit is another question. About 50% of their business is commercial aerospace engines, but if you count the ITP business, the dependency to commercial aerospace growth to ~60%. Then we have the power business, which isn’t exactly thriving either.

When I put my smallish bet on RR, I thought that this business needs to keep an investment grade credit rating, just because of the huge amount of liabilities and assets resulting from the long tail nature of their business (service contracts, hedges etc ). They have -3GBP of equity and a ~35GBP of assets which is a pretty large balance sheet for a company of RR size. if the counterparties get nervous, they need to recapitalize, no way around that and that could mean partial nationalization. Hard to handicap, so I decided to get out when I saw this coming.

What really is going to happen is anyone’s guess, but they have challenges abound.
Title: Re: RR - Rolls-Royce
Post by: ValuePadawan on June 02, 2020, 08:45:07 AM
Rolls Royce will survive, but if current equity owners benefit is another question. About 50% of their business is commercial aerospace engines, but if you count the ITP business, the dependency to commercial aerospace growth to ~60%. Then we have the power business, which isn’t exactly thriving either.

When I put my smallish bet on RR, I thought that this business needs to keep an investment grade credit rating, just because of the huge amount of liabilities and assets resulting from the long tail nature of their business (service contracts, hedges etc ). They have -3GBP of equity and a ~35GBP of assets which is a pretty large balance sheet for a company of RR size. if the counterparties get nervous, they need to recapitalize, no way around that and that could mean partial nationalization. Hard to handicap, so I decided to get out when I saw this coming.

What really is going to happen is anyone’s guess, but they have challenges abound.

Thanks Spek I appreciate you sharing your point of view! Do you have a view on if it will make a difference if the Bank of England starts buying corporate bonds? I've noticed GE's credit default spreads have held up much better than RR's I'm attributing that to the Fed's buying of corporate bonds. Do you think I am missing anything?

https://www.assetmacro.com/united-states/credit-default-swaps-cds/ge-capital-credit-default-swaps-ge-5y-cds/
https://www.assetmacro.com/united-kingdom/credit-default-swaps-cds/rolls-royce-credit-default-swaps-rolls-5y-cds/
Title: Re: RR - Rolls-Royce
Post by: Sunrider on June 02, 2020, 09:23:38 AM
Rolls Royce will survive, but if current equity owners benefit is another question. About 50% of their business is commercial aerospace engines, but if you count the ITP business, the dependency to commercial aerospace growth to ~60%. Then we have the power business, which isn’t exactly thriving either.

When I put my smallish bet on RR, I thought that this business needs to keep an investment grade credit rating, just because of the huge amount of liabilities and assets resulting from the long tail nature of their business (service contracts, hedges etc ). They have -3GBP of equity and a ~35GBP of assets which is a pretty large balance sheet for a company of RR size. if the counterparties get nervous, they need to recapitalize, no way around that and that could mean partial nationalization. Hard to handicap, so I decided to get out when I saw this coming.

What really is going to happen is anyone’s guess, but they have challenges abound.

I believe they stated in a recent release that none of their facilities (including their hedge book) has any clauses tied to their credit rating ... so on that basis your concern should be addressed? As to the impact of the dramatically lower flying hours ... of course that's a guess when things will revert, though the loss of sales this year should help a bit as they sell engines at an upfront loss.
Title: Re: RR - Rolls-Royce
Post by: starmitt on June 02, 2020, 10:27:22 AM
This is probably a negative two cents, but this discussion seems very centered on roughly 35% of their business - see https://www.rolls-royce.com/~/media/Files/R/Rolls-Royce/documents/annual-report/2019/2019-full-annual-report.pdf (civil aerospace looks to be about 50% of revs, with large aircraft engines 71% of that). On initial impression the other lines of business should be much less impacted. Sorry, not deep on this yet.

Two other thoughts on that 35%. No idea whether this is current or to what extent, but https://theaircurrent.com/airlines/confusion-among-u-s-airlines-as-airplanes-fly-empty-to-get-bailout-funds/ suggests service revenues might not be as badly impacted as imagined. Still I would be inclined to model the worst case short term, but recognize govts everywhere can complicate things.

Longer term - going out a couple years - if RR survives, consider this: https://pbs.twimg.com/media/EVU3t4KXkAES7IG?format=png&name=900x900



Title: Re: RR - Rolls-Royce
Post by: Broeb22 on July 29, 2020, 12:21:42 PM
https://www.equities.com/news/rolls-royce-plans-1-5-billion-equity-raise-to-plug-capital-shortfall (https://www.equities.com/news/rolls-royce-plans-1-5-billion-equity-raise-to-plug-capital-shortfall)

Anyone more knowledgeable than I know what this equity raise would do equity holders / potential upside?

I wonder what the widebody market looks like post-COVID. It seems like short-term narrow body will get more service and plane sales than widebody. In 3-5 years, widebody is probably back to pre-COVID. What will it take for Rolls to get there and what will be left for equity holders?
Title: Re: RR - Rolls-Royce
Post by: Broeb22 on July 29, 2020, 12:46:01 PM
https://seekingalpha.com/article/4356237-capital-interviews-steven-wood-of-greenwood-investors-discusses-investment-process-and-how-to (https://seekingalpha.com/article/4356237-capital-interviews-steven-wood-of-greenwood-investors-discusses-investment-process-and-how-to)

Steven Wood, who has done a lot of work on the company, shared some thoughts on Rolls.

I bought this years ago after Steven shared his research with my prior firm. The guy does meticulous work; there's no doubt about that.

But he's a guy who seems to be in the "precisely wrong" camp as opposed to approximately right a lot on this idea (and other investments).

I remember in 2016 when we first purchased it that free cash flow was going to inflect higher in 2 years, and I don't know that it has (or will now that COVID may be here a while).
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on July 29, 2020, 04:47:04 PM
https://www.equities.com/news/rolls-royce-plans-1-5-billion-equity-raise-to-plug-capital-shortfall (https://www.equities.com/news/rolls-royce-plans-1-5-billion-equity-raise-to-plug-capital-shortfall)

Anyone more knowledgeable than I know what this equity raise would do equity holders / potential upside?

I wonder what the widebody market looks like post-COVID. It seems like short-term narrow body will get more service and plane sales than widebody. In 3-5 years, widebody is probably back to pre-COVID. What will it take for Rolls to get there and what will be left for equity holders?

Well a reasonable approach is to look at the 1.5GBP relative to their current market cap (~4.9GBP). Assuming a discount and call it 4.5GBP, we are looking at a ~30% increase in sharecount.
Title: Re: RR - Rolls-Royce
Post by: aryadhana on July 30, 2020, 06:53:01 AM
Don't know why they didn't make an effort to buy sell more earlier.  They can issue current shareholders rights to buy one or two shares at £2.00 (a 20% discount... heck it could be for £1.00 and the economics wouldn't change).  Shareholders who don't want to participate can sell their rights to compensate for any dilution, and nothing is lost.  In fact they should just raise too much and return it in the form of excess dividends or buybacks as the course of assets, liabilities, and opportunities becomes more clear.  It's a company with quality assets and a lot of franchise value making important stuff.  They just need to raise enough to deleverage and have enough cash leftover to very reliably moot questions about unexpected capex or other contractual liabilities. 

Anyway trading near March lows today.  Maybe I'm missing something.  (Opened a position today).
Title: Re: RR - Rolls-Royce
Post by: Broeb22 on July 30, 2020, 08:03:49 AM
Don't know why they didn't make an effort to buy more earlier.  They can issue current shareholders rights to buy one or two shares at £2.00 (a 20% discount... heck it could be for £1.00 and the economics wouldn't change).  Shareholders who don't want to participate can sell their rights to compensate for any dilution, and nothing is lost.  In fact they should just raise too much and return it in the form of excess dividends or buybacks as the course of assets, liabilities, and opportunities becomes more clear.  It's a company with quality assets and a lot of franchise value making important stuff.  They just need to raise enough to deleverage and have enough cash leftover to very reliably moot questions about unexpected capex or other contractual liabilities. 

Anyway trading near March lows today.  Maybe I'm missing something.  (Opened a position today).

One thing that always surprises me is how often companies raise capital at the lows. Your comment totally makes sense, but the same could have been said years ago when the share price was higher and some of these issues were known. I know East probably would have been crucified years ago by investors because the stock was "too cheap" then to be raising capital. Behaviorally its tough to raise capital when you don't need it for a potential, hypothetical time in the future when you may need it, but it sure beats the shit out of massively diluting yourself at the lows.
Title: Re: RR - Rolls-Royce
Post by: TwoCitiesCapital on July 30, 2020, 08:13:42 AM
Don't know why they didn't make an effort to buy more earlier.  They can issue current shareholders rights to buy one or two shares at £2.00 (a 20% discount... heck it could be for £1.00 and the economics wouldn't change).  Shareholders who don't want to participate can sell their rights to compensate for any dilution, and nothing is lost.  In fact they should just raise too much and return it in the form of excess dividends or buybacks as the course of assets, liabilities, and opportunities becomes more clear.  It's a company with quality assets and a lot of franchise value making important stuff.  They just need to raise enough to deleverage and have enough cash leftover to very reliably moot questions about unexpected capex or other contractual liabilities. 

Anyway trading near March lows today.  Maybe I'm missing something.  (Opened a position today).

One thing that always surprises me is how often companies raise capital at the lows. Your comment totally makes sense, but the same could have been said years ago when the share price was higher and some of these issues were known. I know East probably would have been crucified years ago by investors because the stock was "too cheap" then to be raising capital. Behaviorally its tough to raise capital when you don't need it for a potential, hypothetical time in the future when you may need it, but it sure beats the shit out of massively diluting yourself at the lows.

I'm always shocked when companies decide to do a  new issuance instead of a rights offering. Rights offerings are massively more shareholder friendly in that you give your existing shareholder base first rights of refusal and the ability to participate at the same terms. It's slightly less guaranteed than a new offering (because you don't have to exercise the rights), but you're paying up for the that guarantee with the underwriters :/

I get it when you're in dire need of the money, but it doesn't seem to me that RR is knocking on deaths door.

Why is it more companies don't do this sort of thing?
Title: Re: RR - Rolls-Royce
Post by: aryadhana on July 30, 2020, 09:22:19 AM
Quote
One thing that always surprises me is how often companies raise capital at the lows. Your comment totally makes sense, but the same could have been said years ago when the share price was higher and some of these issues were known. I know East probably would have been crucified years ago by investors because the stock was "too cheap" then to be raising capital. Behaviorally its tough to raise capital when you don't need it for a potential, hypothetical time in the future when you may need it, but it sure beats the shit out of massively diluting yourself at the lows.

That's my frustration.  There's nothing particularly "dilutive" or not about raising equity for good reasons.  Shareholders who think they're getting screwed can and should just participate (or sell their right to do so). 

Quote
I'm always shocked when companies decide to do a  new issuance instead of a rights offering. Rights offerings are massively more shareholder friendly in that you give your existing shareholder base first rights of refusal and the ability to participate at the same terms. It's slightly less guaranteed than a new offering (because you don't have to exercise the rights), but you're paying up for the that guarantee with the underwriters :/

To be honest, I'm not even sure it's less guaranteed.  How could the distribution of decidedly in-the-money rights fail to be subscribed?  Now if the rights offering comes out of nowhere and bespeaks some hidden or otherwise unknown problem then the very indication that the offering would be pursued might push share prices down enough for the offering to fail.  Likewise if there is no franchise value and company is just an option on negative equity.  That's not the case here.  This looks nothing like HTZ and there's obvious value (which is why people are paying for it every day). 

Rights issues are more common in Europe than America (guessing that England falls somewhere in between). 
Title: Re: RR - Rolls-Royce
Post by: rb on July 30, 2020, 01:49:45 PM
Don't know why they didn't make an effort to buy more earlier.  They can issue current shareholders rights to buy one or two shares at £2.00 (a 20% discount... heck it could be for £1.00 and the economics wouldn't change).  Shareholders who don't want to participate can sell their rights to compensate for any dilution, and nothing is lost.  In fact they should just raise too much and return it in the form of excess dividends or buybacks as the course of assets, liabilities, and opportunities becomes more clear.  It's a company with quality assets and a lot of franchise value making important stuff.  They just need to raise enough to deleverage and have enough cash leftover to very reliably moot questions about unexpected capex or other contractual liabilities. 

Anyway trading near March lows today.  Maybe I'm missing something.  (Opened a position today).

One thing that always surprises me is how often companies raise capital at the lows. Your comment totally makes sense, but the same could have been said years ago when the share price was higher and some of these issues were known. I know East probably would have been crucified years ago by investors because the stock was "too cheap" then to be raising capital. Behaviorally its tough to raise capital when you don't need it for a potential, hypothetical time in the future when you may need it, but it sure beats the shit out of massively diluting yourself at the lows.

I'm always shocked when companies decide to do a  new issuance instead of a rights offering. Rights offerings are massively more shareholder friendly in that you give your existing shareholder base first rights of refusal and the ability to participate at the same terms. It's slightly less guaranteed than a new offering (because you don't have to exercise the rights), but you're paying up for the that guarantee with the underwriters :/

I get it when you're in dire need of the money, but it doesn't seem to me that RR is knocking on deaths door.

Why is it more companies don't do this sort of thing?
I'm with you on this one. Especially because rights offerings are actually quite popular in Europe. When I was in London in 08/09 there were rights offerings left right and center. Sometimes they would do right and then a secondary if the rights didn't bring in enough. Which is also cheaper cause you pay % comish on your secondary.

It could be that the situation at RR is worse than it looks.

This is one holding that didn't work out as planned for me.
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on July 30, 2020, 02:41:59 PM
I agree that rights offerings are more shareholder friendly. One issue though is that often foreign shareholders can’t participate due to legal or technical barriers. I think ADR holders won’t be able to participate for example.
Title: Re: RR - Rolls-Royce
Post by: rb on July 30, 2020, 03:23:02 PM
yea, there are some points in there, but RR doesn't really have a huge ADR. So yeah, it's weird they didn't do rights.
Title: Re: RR - Rolls-Royce
Post by: NotSoWise on August 03, 2020, 03:09:38 AM
With the current price at GBP 2,13 its interesting to see what RR will do in Sep. If they proceed with GBP 1-1.5bn RI at a price of GBP 1.0 or 1.5 per share (assuming more share price fall) then it means they are in super deep hole without any options and all its PR about good liquidity is BS. Fair to say, IR said "current" liquidity, not long term.
Taking IB advisors (3 of them) usually means they are pretty serious about RI and saying "we consider options" usually means we work on RI. But will they pull the trigger at GBP 1 per share?

Interesting bit is the Spanish business - can they sell it and at what price. After signing, would they still proceed with RI? A lot will depend on when the long flights will pick up and to what degree, which is unknown at the moment.

Do you guys have any numbers what % of flights are we at the moment?



Title: Re: RR - Rolls-Royce
Post by: Spekulatius on August 03, 2020, 04:02:48 AM
With the current price at GBP 2,13 its interesting to see what RR will do in Sep. If they proceed with GBP 1-1.5bn RI at a price of GBP 1.0 or 1.5 per share (assuming more share price fall) then it means they are in super deep hole without any options and all its PR about good liquidity is BS. Fair to say, IR said "current" liquidity, not long term.
Taking IB advisors (3 of them) usually means they are pretty serious about RI and saying "we consider options" usually means we work on RI. But will they pull the trigger at GBP 1 per share?

Interesting bit is the Spanish business - can they sell it and at what price. After signing, would they still proceed with RI? A lot will depend on when the long flights will pick up and to what degree, which is unknown at the moment.

Do you guys have any numbers what % of flights are we at the moment?

PR around “our liquidity is strong” is almost always BS, because in most cases, solvency is the issue, not near term liquidity. The way RR business is structured (depending on LT contracts and viability), they can’t  afford to have junk credit, as they need the trust of their customers and access to capital markets. It is what it is, the capital raise will take place regardless of price.

That’s one of the issues with rights issues - they can take a long time and the stock can get into a death spiral in the meantime. This happened with the Brit banks too post GFC.
Title: Re: RR - Rolls-Royce
Post by: aryadhana on August 03, 2020, 05:29:59 AM
Do you guys have any numbers what % of flights are we at the moment?

I don't have the numbers atm, but worth pointing out that the % of flights number is much, much better than the (much more frequently cited) % of passengers number. 
Title: Re: RR - Rolls-Royce
Post by: Xerxes on August 03, 2020, 10:20:55 AM
to give you an idea from RTX's Q2 results.

"I think, Rob, what you need to think about is, what is the actual number of aircraft flying today. We think it’s the total flights are down about 50% and so well air passenger traffic is down 80%, which is better than the 95% it was. There’s still planes out there flying around and around, again down 50%. That’s really what we’re basing the outlook on."


i should add that with the statement above, one can get to the conclusion that the focus of airline economics are shifting from unit-costs to trip costs.
Title: Re: RR - Rolls-Royce
Post by: fareastwarriors on August 07, 2020, 02:47:02 PM

Activist shareholder ValueAct sells out of Rolls-Royce: source


https://www.reuters.com/article/us-rolls-royce-hldg-valueact-stake/activist-shareholder-valueact-sells-out-of-rolls-royce-source-idUSKCN2530HE?il=0
Title: Re: RR - Rolls-Royce
Post by: Value^2 on August 14, 2020, 07:31:05 AM
Don't know why they didn't make an effort to buy more earlier.  They can issue current shareholders rights to buy one or two shares at £2.00 (a 20% discount... heck it could be for £1.00 and the economics wouldn't change).  Shareholders who don't want to participate can sell their rights to compensate for any dilution, and nothing is lost.  In fact they should just raise too much and return it in the form of excess dividends or buybacks as the course of assets, liabilities, and opportunities becomes more clear.  It's a company with quality assets and a lot of franchise value making important stuff.  They just need to raise enough to deleverage and have enough cash leftover to very reliably moot questions about unexpected capex or other contractual liabilities. 

Anyway trading near March lows today.  Maybe I'm missing something.  (Opened a position today).

One thing that always surprises me is how often companies raise capital at the lows. Your comment totally makes sense, but the same could have been said years ago when the share price was higher and some of these issues were known. I know East probably would have been crucified years ago by investors because the stock was "too cheap" then to be raising capital. Behaviorally its tough to raise capital when you don't need it for a potential, hypothetical time in the future when you may need it, but it sure beats the shit out of massively diluting yourself at the lows.

I'm always shocked when companies decide to do a  new issuance instead of a rights offering.
Rights offerings are massively more shareholder friendly in that you give your existing shareholder base first rights of refusal and the ability to participate at the same terms. It's slightly less guaranteed than a new offering (because you don't have to exercise the rights), but you're paying up for the that guarantee with the underwriters :/

I get it when you're in dire need of the money, but it doesn't seem to me that RR is knocking on deaths door.

Why is it more companies don't do this sort of thing?

At least one reason why companies prefer public offerings instead o rights offering is that, they wants to broaden shareholder base and be less influenced by large owners. Generally speaking those insiders who doesn't own meaningful amount of stock, hate to be accountable to the large investors.
Title: Re: RR - Rolls-Royce
Post by: Value^2 on August 14, 2020, 07:34:46 AM

Activist shareholder ValueAct sells out of Rolls-Royce: source


https://www.reuters.com/article/us-rolls-royce-hldg-valueact-stake/activist-shareholder-valueact-sells-out-of-rolls-royce-source-idUSKCN2530HE?il=0


ValueAct had sold $1 billion of Valeant stock when it was near its high, before the Philidor revelations, but continued to own 15 million shares, telling its big investors that “we do not cut and run at the first signs of trouble. Instead, we roll up our sleeves and focus our efforts to try to preserve the long-term opportunities at the company.


Different company, just wanted to point out their empty rhetoric.
Title: Re: RR - Rolls-Royce
Post by: TwoCitiesCapital on September 30, 2020, 06:02:04 PM
https://www.ft.com/content/feea2bfb-b5d7-4fd5-a2c9-b2429c5961e2

Rolls confirms equity raise for £2B - will not seek sovereign wealth involvement.

Thought I saw something about a rights issue - any one know if that has been confirmed?
Title: Re: RR - Rolls-Royce
Post by: Broeb22 on October 02, 2020, 04:05:18 AM
I remember Steven Wood from Greenwood being one of the loudest proponents of this stock, and I remember him being very confident of his conclusions and that the outcome we’re seeing with a capital raise at the lows as being almost impossible. Has he had any recent updates?
Title: Re: RR - Rolls-Royce
Post by: Xerxes on October 02, 2020, 08:36:00 AM
Rolls got a direct hit due to the pandemic.
No one could have seen it coming. Last year this time if someone asked me the likelihood of an event that will have an outsized severe impact on the wide-body segment, I would have laughed.

At the end of the day, as great of an engineering firm it is, it was a one trick pony with an outsized exposure to wide body segment, which itself had an oversupply different models from Boeing and Airbus. (I.e RR got a double hit as it supplies the engines both for A330NEO and A350; the former overlaps with the bottom end of the latter)
Title: Re: RR - Rolls-Royce
Post by: TwoCitiesCapital on October 02, 2020, 11:10:23 AM
Rolls got a direct hit due to the pandemic.
No one could have seen it coming. Last year this time if someone asked me the likelihood of an event that will have an outsized severe impact on the wide-body segment, I would have laughed.

At the end of the day, as great of an engineering firm it is, it was a one trick pony with an outsized exposure to wide body segment, which itself had an oversupply different models from Boeing and Airbus. (I.e RR got a double hit as it supplies the engines both for A330NEO and A350; the former overlaps with the bottom end of the latter)

I think his point was that the comments were made after COVID. I believe I also saw something from them saying despite COVID, the company would have ample liquidity and not need to do a stock offering. Obviously that's not the case with them issuing £2B with a £2.5B market cap.

Title: Re: RR - Rolls-Royce
Post by: coc on October 02, 2020, 11:17:28 AM
Also another blowup for the Sequoia Fund. About 5% of their capital at cost, I think.
Title: Re: RR - Rolls-Royce
Post by: Broeb22 on October 02, 2020, 12:17:47 PM
I just re-read Wood’s June/July interview and he talks about a 35% FCF yield like what doesn’t the market understand, and this is another good lesson for me where listening to what the market is saying is worth doing to an extent. A healthy large business going through temporary distress simply doesn’t trade at those FCF yields.

It’s a delicate balance because you don’t want to look at negative price action and bail, but I’m more thinking sometimes it’s good to reverse engineer the expectations built into the price to get to back to a market average return.

It’s kind of surprising to me because I genuinely believe Wood is smart and very hard-working. But he seems lacking in humility or the ability to kill his own thesis.


 
Title: Re: RR - Rolls-Royce
Post by: Broeb22 on October 02, 2020, 05:31:50 PM
Rolls got a direct hit due to the pandemic.
No one could have seen it coming. Last year this time if someone asked me the likelihood of an event that will have an outsized severe impact on the wide-body segment, I would have laughed.

At the end of the day, as great of an engineering firm it is, it was a one trick pony with an outsized exposure to wide body segment, which itself had an oversupply different models from Boeing and Airbus. (I.e RR got a double hit as it supplies the engines both for A330NEO and A350; the former overlaps with the bottom end of the latter)

Respectfully, I think the argument that they were hit by an unforeseeable pandemic (while true) is bull$hit for a couple of reasons. 1) the amount of capital they need to raise is so significant that some amount of disposals/capital raise was likely necessary in any event and 2) more importantly, they operate in a cyclical industry where $hit happens every once in a while. If you’re going to argue with a straight face that 9/11, the 2008 crisis, and now this were all unforeseeable at the time you’d be correct, but there is enough history that a prudent thing to do is to have a conservative balance sheet, and if you need to raise capital, do it when things are going OK to avoid 50% dilution like Rolls Is looking at it.

Additionally, while you might say this is the worst the airline industry has ever seen, that’s true, but if you look at available seat miles ( which I think is the right metric (not revenue passenger miles) because it captures the number of planes flying regardless of if people are on them) you would see that 9/11 and 2008 were pretty damn bad. 2008 in some ways could have been worse because customers didn’t know when the worst was going to be over so it was a couple of years of pain vs. this still has the potential to be short-lived, depending on the pandemic this winter and the govt fiscal response to it.

All that’s said, with Rolls finally getting some breathing room, this looks like a nice speculative long here.
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on October 02, 2020, 07:22:57 PM
I think it is a bit disingenuous to say that this was just bad luck. While it is true that the COVID-19 crisis was unforeseeable, it was at some point clear that this bet had a substantial risk of permanent impairment.
RR was wounded before COVID-19 - the Trent 1000 engine troubles, years of weak cash flow, manufacturing issues, widebody exposure. When you read this thread here for example, there were pretty clear indicators even for a somewhat casual observer, that this could go seriously or the rails.

So in my opinion, the main mistake was not making the bet, it was failing to recognize when things we’re likely to go downhill and bailing out. Turnaround plays are just hard.
Title: Re: RR - Rolls-Royce
Post by: Xerxes on October 04, 2020, 02:51:43 PM
Great discussion folks:

i ll just throw in few qualitative points for the sake of discussion:

Aside the development issues RR has had, there has been a few strategic headwinds in recent years. (1) They lost the business jet position with Gulfstream to P&WC early in the decade, (2) they sold their stake in IAE to P&W and effectively removed themselves from the narrow body segment, which is now the absolute place to be (3) they got impacted by Bombardier drop in Global production rate on the legacy aircraft (4) there has been softness in the wide-body market and that is looking like more and more a permanent structural change.

On (1) & (3), RR has been working hard to get back into the game (i.e. note the brand new Gulfstream G700 + Global 5500/6500); on (2) P&W and CFM are well trenched in for the long haul; On (4) the wide-body softness looks more and more like a structural change. With the introduction of the likes of Airbus A.321LR, the upper segment of that narrow-body category is making the lower end of wide-body very vulnerable. (dont believe Boeing MOM will happen either) On a positive side, RR has A.350 and A.330NEO to itself.

Consolidation:

I believe in the long term RR needs scale. Note that Honeywell, future Raytheon Technologies and GE all have market capitalization north of $100B whereas Rolls Royce has a market cap of ~$13B. I cannot believe that with all the consolidation happening in the A&D sector, RR will not be participating as a target.

I dont believe Raytheon Technologies will be a buyer given where they are now with Raytheon about to be folded in (that said P&W is very complementary to RR from a product segment point of view); it would definitely not be GE (given their financial troubles and more importantly a GE-RR tie-up would mean a virtual monopoly in the wide-body segment). That leaves Honeywell or other PE-like shop as potential buyers.

Broeb22,

I don't disagree with anything you or Spekulatius are saying. I don't know the details of how much cash they need, or what they said or didn't say. But if the argument is that pre-pandemic, they should have raised as much as they could as the turnaround was going to be tough anyways, even without the pandemic, I am not pushing back on that.

My view however is that, the question of cash raise (how much and when) is rather more tactical. I voiced my view back in January (re-posted above) well before the pandemic, that this is a question of scale and the diversity of the product pipeline.

Die was cast more than a decade ago, when RR chose to sell its stake in IAE to Pratt & Whitney, while the latter not only consolidated its hold over the joint venture, it embarked on a brand new development program aim squarely at the narrow-body segment. Rolls Royce didn't plant any seeds while Pratt & Whitney invested heavily.

Today, Rolls Royce needs to part of a bigger franchise. It is bad enough to see its market evaporate, but not to have the B/S to be able to continue to develop in the downturn is compounding it.

Going back to cash raise, i am not sure what view Warren East was airing before the pandemic about Rolls Royce' stock being undervalued in the market, but I imagine that issuing new equity and saying that the stock is undervalued at the same time would have been double-talk.


Title: Re: RR - Rolls-Royce
Post by: Broeb22 on October 05, 2020, 04:45:17 AM
Shareholders probably would have pushed back and demanded a rights issue, to avoid dilution. So kind of in the same boat either way, but without the massive drawdown.

I do think that cutting thousands of staff while raising equity could have been difficult internally. From an outsiders perspective, cutting staff to save money has a similar effect as raising capital, but the average worker would probably feel why do I have to lose my job since we have all this money floating around (after a hypothetical capital raise). I know that sounds silly, but who knows?

Title: Re: RR - Rolls-Royce
Post by: SharperDingaan on October 05, 2020, 06:48:44 AM
"From an outsiders perspective, cutting staff to save money has a similar effect as raising capital" ....

Sorry, but cutting staff is radically different - it is all about cutting FOH and lowering BE sales as much as you possibly can. When planes don't fly, engines don't wear out, new planes don't get built (engines + spares), and it takes more time until the next overhaul at 'X" hours of service. Revenues drop like a brick.

RR is not a lot different to the auto-industry. The supply chain employs a lot of people, and the spend has a material multiplier. Under covid, most would expect the government as a material new shareholder, preserving jobs. Post covid RR goes the way of Airbus, euro nations combining parts to produce a greater whole. The same thing will eventually occur in the US - industry mergers, + government contracts to underpin a minimum cash flow.

Ordinarily it's a great business - live on the predictable service revenue, and all new sales are gravy. But it implicitly assumed that planes would ALWAYS keep flying - a very valid assumption. Covid has been the black swan, in the last 2% of probability - tail risk that exists to be exploited.

For most RR shareholders, the smartest thing is to just sell it and buy it back later.
Simply ride out the uncertainty in gilts, while being pretty certain of a repurchase at 30-50% less, net of dilution. The more aggressive would use options as well.

Different strokes.

SD










 
Title: Re: RR - Rolls-Royce
Post by: Xerxes on October 05, 2020, 08:41:51 AM
Shareholders probably would have pushed back and demanded a rights issue, to avoid dilution. So kind of in the same boat either way, but without the massive drawdown.

I do think that cutting thousands of staff while raising equity could have been difficult internally. From an outsiders perspective, cutting staff to save money has a similar effect as raising capital, but the average worker would probably feel why do I have to lose my job since we have all this money floating around (after a hypothetical capital raise). I know that sounds silly, but who knows?

With or without equity raise, production people get cut as production rate plummet with the supply chain unraveling. But if the intent is maintain a robust product portfolio one needs to continue to invest in its engineering workforce and R&D.
Title: Re: RR - Rolls-Royce
Post by: TwoCitiesCapital on October 06, 2020, 08:18:06 AM
So the rights issue gives you rights to buy 10 new shares for every 3 you own at a steep discount to the market price - ~0.32 GBP instead of the current price of 1.45 GBP.

Isn't this a huge incentive to buy the shares currently? For every 3 shares you purchase @ 1.45 GBP, you get the right to buy 10 more at 0.32 GBP giving you a blended average cost of 0.58 GBP while the market value is 2.5x that price. As long as the market price remains above 0.32, shouldn't there be a bid for the shares to get these valuable rights?

Seems like a temporary technical lift to the stock and maybe why it's up 18% today. But the further it climbs, the more powerful that force becomes because the more valuable those rights are.

Makes one wonder what happens when the rights are issued/exercised though. Would that be the reversal of the trend?

Title: Re: RR - Rolls-Royce
Post by: Broeb22 on October 06, 2020, 08:27:13 AM
So the rights issue gives you rights to buy 10 new shares for every 3 you own at a steep discount to the market price - ~0.32 GBP instead of the current price of 1.45 GBP.

Isn't this a huge incentive to buy the shares currently? For every 3 shares you purchase @ 1.45 GBP, you get the right to buy 10 more at 0.32 GBP giving you a blended average cost of 0.58 GBP while the market value is 2.5x that price. As long as the market price remains above 0.32, shouldn't there be a bid for the shares to get these valuable rights?

Seems like a temporary technical lift to the stock and maybe why it's up 18% today. But the further it climbs, the more powerful that force becomes because the more valuable those rights are.

Makes one wonder what happens when the rights are issued/exercised though. Would that be the reversal of the trend?

It seemed like there were restrictions on US-based investors from investing through the rights offering. Is this correct/incorrect? I would like to invest via the rights offering, but don't think I can.

If US-based investors cannot invest, perhaps there is a weird arbitrage thing happening where some investors can't buy the rights but can buy shares and think the extra capital makes the investment case stronger, even at 1.45?
Title: Re: RR - Rolls-Royce
Post by: TwoCitiesCapital on October 06, 2020, 08:46:30 AM
So the rights issue gives you rights to buy 10 new shares for every 3 you own at a steep discount to the market price - ~0.32 GBP instead of the current price of 1.45 GBP.

Isn't this a huge incentive to buy the shares currently? For every 3 shares you purchase @ 1.45 GBP, you get the right to buy 10 more at 0.32 GBP giving you a blended average cost of 0.58 GBP while the market value is 2.5x that price. As long as the market price remains above 0.32, shouldn't there be a bid for the shares to get these valuable rights?

Seems like a temporary technical lift to the stock and maybe why it's up 18% today. But the further it climbs, the more powerful that force becomes because the more valuable those rights are.

Makes one wonder what happens when the rights are issued/exercised though. Would that be the reversal of the trend?

It seemed like there were restrictions on US-based investors from investing through the rights offering. Is this correct/incorrect? I would like to invest via the rights offering, but don't think I can.

If US-based investors cannot invest, perhaps there is a weird arbitrage thing happening where some investors can't buy the rights but can buy shares and think the extra capital makes the investment case stronger, even at 1.45?

I hadn't heard that, ,but then again it took a little bit for me to hear/see the full details of the rights offering.

Maybe it's only problematic if you own the ADRs? You'll probably receive a cash distribution from the sale of the rights, but I own the actual RR shares on the London exchange via my account @ Interactive Brokers so am expecting to still receive the rights unless if there is something I haven't yet heard.
Title: Re: RR - Rolls-Royce
Post by: KJP on October 06, 2020, 09:10:04 AM

Isn't this a huge incentive to buy the shares currently? For every 3 shares you purchase @ 1.45 GBP, you get the right to buy 10 more at 0.32 GBP giving you a blended average cost of 0.58 GBP while the market value is 2.5x that price. As long as the market price remains above 0.32, shouldn't there be a bid for the shares to get these valuable rights?


You are not accounting for the fact that post-rights offering the shares will not revert to their pre-offering price because of the dilution from the offering.  Here's the math behind a simple example:

1,000,000 shares outstanding at $1.45/share = Equity value of $1.45 million
3,333,333 shares issued at $0.32/share = Cash raised of $1,066,666

New shares 4,333,333; Assumed new equity value (old value + cash raised) = $2,516,667

New per share value = 2,516,667/4,333,333 = $.58 = blended cost basis of someone who fully subscribes under the terms you describe. 

Of course, the rights offering can create value by lowering the chances of default, and thus increasing new equity value by more than the cash raised.  But the price of the rights offering relative to the market price is irrelevant for shareholders who fully subscribe to their pro rate portion of the rights offering.  Of course, if you can't or don't fully subscribe, the price of the rights offering (and resulting dilution) are extremely important to you.  That's why transferability of the rights is important. 

It's also why Greenblatt advised looking for instances in which rights offerings are likely to be underscribed and insiders have agreed to not only fully subscribe but oversubscribe by taking up any unsubscribed portion.  That's insiders trying to transfer value to themselves (Malone/Jonas stuff).
Title: Re: RR - Rolls-Royce
Post by: TwoCitiesCapital on October 06, 2020, 09:31:16 AM

Isn't this a huge incentive to buy the shares currently? For every 3 shares you purchase @ 1.45 GBP, you get the right to buy 10 more at 0.32 GBP giving you a blended average cost of 0.58 GBP while the market value is 2.5x that price. As long as the market price remains above 0.32, shouldn't there be a bid for the shares to get these valuable rights?


You are not accounting for the fact that post-rights offering the shares will not revert to their pre-offering price because of the dilution from the offering.  Here's the math behind a simple example:

1,000,000 shares outstanding at $1.45/share = Equity value of $1.45 million
3,333,333 shares issued at $0.32/share = Cash raised of $1,066,666

New shares 4,333,333; Assumed new equity value (old value + cash raised) = $2,516,667

New per share value = 2,516,667/4,333,333 = $.58 = blended cost basis of someone who fully subscribes under the terms you describe. 

Of course, the rights offering can create value by lowering the chances of default, and thus increasing new equity value by more than the cash raised.  But the price of the rights offering relative to the market price is irrelevant for shareholders who fully subscribe to their pro rate portion of the rights offering.  Of course, if you can't or don't fully subscribe, the price of the rights offering (and resulting dilution) are extremely important to you.  That's why transferability of the rights is important. 

It's also why Greenblatt advised looking for instances in which rights offerings are likely to be underscribed and insiders have agreed to not only fully subscribe but oversubscribe by taking up any unsubscribed portion.  That's insiders trying to transfer value to themselves (Malone/Jonas stuff).

I understand those mechanics which is why I suggested it might revert post offering, but there's nothing that forces it to, right?

It's not like an ex-dividend where the company pays out $1.00 and the share price is reduced by a dollar. In this instance you're receiving rights steeply discounted from the market price and the share price isn't automatically reduced by that value, right? 

You can make the argument, as you've done, that the rights offering derisks the company and the share price could actually rise despite the dilution. Of course, I'm not saying it will happen, just that it's a possibility the rights offering in general can increase value despite dilution.

So, in this case, without an automatic mechanism to bring the share price down, is there not an incentive to buy the shares to get the deeply ITM rights on the cheap for incredibly cheap? And the further the shares rise, the more attractive those rights become fueling more buying?

Maybe the whole thing unwinds when the rights are distributed as everyone heads for the exits at once, but until then it seems it keeps a bid on the shares.

Why not buy a ton of shares, ride some of the technically driven buying upwards, buy protective puts before the official rights distribution date, and then sell the ITM rights when received to get most, if not all, of your capital back? Am I missing something mechanical here that brings all this down?
Title: Re: RR - Rolls-Royce
Post by: TwoCitiesCapital on October 06, 2020, 01:32:04 PM
As I've been mulling over this, I guess my main question was if everyone knows the dilution is coming, and by a calculable finite amount, why wouldn't the shares trade down instead of up by 50% and was trying to figure out why it's been rallying.

But I think I was just failing to put together all of the pieces properly like the de-risking and that it can't immediately trade down due to the rights still not being issued yet.
Title: Re: RR - Rolls-Royce
Post by: MrB on October 07, 2020, 01:21:42 AM

Isn't this a huge incentive to buy the shares currently? For every 3 shares you purchase @ 1.45 GBP, you get the right to buy 10 more at 0.32 GBP giving you a blended average cost of 0.58 GBP while the market value is 2.5x that price. As long as the market price remains above 0.32, shouldn't there be a bid for the shares to get these valuable rights?


You are not accounting for the fact that post-rights offering the shares will not revert to their pre-offering price because of the dilution from the offering.  Here's the math behind a simple example:

1,000,000 shares outstanding at $1.45/share = Equity value of $1.45 million
3,333,333 shares issued at $0.32/share = Cash raised of $1,066,666

New shares 4,333,333; Assumed new equity value (old value + cash raised) = $2,516,667

New per share value = 2,516,667/4,333,333 = $.58 = blended cost basis of someone who fully subscribes under the terms you describe. 

Of course, the rights offering can create value by lowering the chances of default, and thus increasing new equity value by more than the cash raised.  But the price of the rights offering relative to the market price is irrelevant for shareholders who fully subscribe to their pro rate portion of the rights offering.  Of course, if you can't or don't fully subscribe, the price of the rights offering (and resulting dilution) are extremely important to you.  That's why transferability of the rights is important. 

It's also why Greenblatt advised looking for instances in which rights offerings are likely to be underscribed and insiders have agreed to not only fully subscribe but oversubscribe by taking up any unsubscribed portion.  That's insiders trying to transfer value to themselves (Malone/Jonas stuff).

From spending 10 minutes scanning the reading the prospectus https://www.rolls-royce.com/investors/rights-issue/full-rights-issue.aspx
Clearly headlined with "Proposed 10 for 3 Rights Issue of up to 6,436,651,043 New Ordinary Shares at 32 pence
per New Ordinary Share"
and page 11 "(C) Number of issued and fully paid securities As at the Latest Practicable Date, there were 1,930,995,313 Ordinary Shares in issue. Following the passing of the Ordinary Resolution at the General Meeting and pursuant to the Rights Issue, the Company will issue up to 6,436,651,043 New Ordinary Shares. The Rights Issue will be made on the basis of 10 New Ordinary Shares for every 3 Existing Ordinary Shares in the Company" or page 62 which lays it out nicely.

According to my (do your own work) reading..

1.9Bn shares @ today's price of GBP 1.50 = GBP 2.8Bn + rights of 32p * 6.43Bn shares (1.9Bn/3*10) or GBP 2Bn for a total of GBP4.9Bn.
GBP 4.9Bn/8.3Bn new total shares = 59p

P.S. Also 30Bn C shares and 1 special share (government) outstanding, but seems that you can ignore those...again that's my reading


Conclusion, TODAY the market is indicating a value of 59p for post rights issue shares, which is where you can expect them to trade.
Title: Re: RR - Rolls-Royce
Post by: MrB on October 07, 2020, 03:46:15 AM
Furthermore on p.19 of 2020H1 report they lay out the expected borrowings by Feb 2022 totalling GBP 6.5Bn. Looking at their balance sheet the cash is more than cancelled out by the contract liabilities (deferred revenue in my books), so very roughly EV is £11-£12Bn and Warren East is promising you £750m in FCF in 2022. So if all goes according to East's plan then you're buying at roughly 15x 2022 EV/FCF

Of course that is assuming you can get comfortable with their accounting; needs someone smarter than me...

Moving on....
Title: Re: RR - Rolls-Royce
Post by: KJP on October 07, 2020, 05:44:44 AM
As I've been mulling over this, I guess my main question was if everyone knows the dilution is coming, and by a calculable finite amount, why wouldn't the shares trade down instead of up by 50% and was trying to figure out why it's been rallying.

But I think I was just failing to put together all of the pieces properly like the de-risking and that it can't immediately trade down due to the rights still not being issued yet.

The quoted price of a publicly traded equity is just the last reported trade.  So, to the extent that nothing forces people to transact, then you're correct that there's nothing that forces the share price to account for the dilution, just as there is nothing that forces the share price to account for the dilution of a stock split.  But as a practical matter, prices generally do reflect these events once they occur. 

In general, in a value-neutral rights offering priced below the market price, the share price decline should not occur until the rights are issued, because the rights are valuable, thus pre-offering share price = post-offering share + value of right, which by hypothesis we've said is the same as the pre-announcement price because the offering is value neutral.
Title: Re: RR - Rolls-Royce
Post by: SharperDingaan on October 07, 2020, 05:53:12 AM
One might also want to consider that AFTER the 75%+ dilution, RR is NOT institutionally investable with 8.3B shares outstanding. There will have to be a material RS, and another material share issuance before this is eventually done. The only question is who is going to buy the shares that institutions are now forced to sell?  because RR no longer meets investment policy minimums. And how low does the price eventually go?

There is a reason for swing trading RR, and parking the proceeds in gilts.
No way you can be adequately compensated enough for the risk involved with continuing to hold.

SD
Title: Re: RR - Rolls-Royce
Post by: ukvalueinvestment on October 07, 2020, 08:01:08 AM
Can you expand on that?  Why would Rolls Royce not be investible by an institution?
Title: Re: RR - Rolls-Royce
Post by: TwoCitiesCapital on October 07, 2020, 10:27:08 AM
Can you expand on that?  Why would Rolls Royce not be investible by an institution?

My guess would due to the share price being so low.

Don't know what the rules are in the UK, but a lot of US pensions aren't allowed to own shares in penny stocks where that is defined as being anything less than $5/share. I think maybe RS in his message means "Reverse Split".

Back in 2009,  when Bank of America first breached $5/share it traded another 25% over the next 3 days  as many  institutional holders were forced to dump.

Shortly thereafter it breached $5 to the upside for 2 days before dumping another 41% over the next week - most of it occurring on the day that fell below $5 again. 

Those were volatile periods anyways, but it seemed to me, as someone who owned multiple financials at the time, that the volatility in BofA was being exacerbated by forced institutional selling.
Title: Re: RR - Rolls-Royce
Post by: TwoCitiesCapital on October 07, 2020, 10:27:14 AM
Can you expand on that?  Why would Rolls Royce not be investible by an institution?

My guess would due to the share price being so low.

Don't know what the rules are in the UK, but a lot of US pensions aren't allowed to own shares in penny stocks where that is defined as being anything less than $5/share. I think maybe RS in his message means "Reverse Split".

Back in 2009,  when Bank of America first breached $5/share it traded another 25% over the next 3 days  as many  institutional holders were forced to dump.

Shortly thereafter it breached $5 to the upside for 2 days before dumping another 41% over the next week - most of it occurring on the day that fell below $5 again. 

Those were volatile periods anyways, but it seemed to me, as someone who owned multiple financials at the time, that the volatility in BofA was being exacerbated by forced institutional selling.

My guess is that all the institutional holders are already gone though. I doubt the actual limit in the UK for "penny shares" is £1/share which is the only benchmark we currently exceed that wouldn't be maintained after the offering.
Title: Re: RR - Rolls-Royce
Post by: SharperDingaan on October 07, 2020, 03:04:53 PM
Correct. In Canada the minimum share price in most Investment Policies for a institutional financial is CAD 5/share. USD 5/share for the US. Probably around 1 pound/share for the UK, but need someone to confirm that.

There is some 'wiggle' room, but not a lot. In Canada, an average CAD 5/share over a 30 day period, No new purchases, up to 90 days to liquidate an existing position. For most, RR will very likely fall into the latter position. Sh1te does occasionally happen, and Investment Policies exist for a reason.

SD
Title: Re: RR - Rolls-Royce
Post by: Spekulatius on October 07, 2020, 03:25:20 PM
For reference, the largest bank in the UK -  Lloyds currently trades around 28 pence.