Investing.com -- Fitch Ratings has upgraded the Long-Term Issuer Default Rating (IDR) and senior unsecured rating of Rolls-Royce (OTC:RYCEY) plc to ’BBB+’ from ’BBB-’, with a positive outlook on the IDR.
The upgrade is a reflection of the significantly improved financial profile of Rolls-Royce, including a Fitch-calculated EBITDA margin of 16.4% and a free cash flow (FCF) margin of 12% in 2024, along with a gross leverage of 1.2x and a net cash position. The company’s robust business profile is underscored by its leadership in the commercial aerospace engine market and solid positions in the defense and power systems segments.
Fitch sees a positive outlook for Rolls-Royce, anticipating further enhancement of its core profitability in the short to medium term. The company is expected to maintain a conservative capital structure and financial policies, including a prudent shareholder distribution policy.
Fitch anticipates that Rolls-Royce will continue to improve its operating margins in the short to medium term, aligning with its main sector peers and Fitch’s expectations of the ’A’ category for the aerospace & defense sector. The Fitch-calculated EBITDA margin is projected to rise above 17% in 2025 and approach 18% in 2026. These improvements are expected to be driven by strong demand for engines and related maintenance services in commercial aerospace, growth in the defense division, and ongoing improvement in the power systems segment’s cost position.
In 2024, Rolls-Royce achieved a strong FCF margin of 12%, up from 7.5% in 2023. This increase was driven by improvements in underlying earnings and continued growth in long-term service agreements (LTSA). Fitch anticipates the cash inflow from LTSA contracts to remain positive, albeit somewhat lower in the short to medium term. The FCF margin is expected to remain around 7% over the next three to four years, supported by the resilience and strength of underlying operating cash flows.
Rolls-Royce’s 2024 results exceeded previous upgrade sensitivities, with key ratios demonstrating stronger than expected performance. Revenue rose by over 15% to GBP17.8 billion, while the Fitch-calculated EBITDA margin increased to 16.4%, and the FCF margin rose to 12%. This improvement was driven by the largest commercial aerospace division, but earnings margins increased across all divisions, reflecting strong underlying demand for products and services and the benefits of ongoing efficiency measures.
Rolls-Royce’s balance sheet remains strong for the ’BBB+’ rating. Through strong FCF generation, Rolls-Royce achieved a GBP1.5 billion Fitch-calculated net cash position at the end of 2024, while EBITDA gross leverage improved to 1.2x from 1.7x at the end of 2023. Shareholder returns are expected to total GBP1.8 billion in 2025, including the recently announced GBP1 billion share buyback.
The company’s recovery is supported by a strong order backlog across all three of its segments. In civil aerospace, the large engine order book reached 1,843 engines at the end of 2024, up from 1,632 at the end of 2023. In defense, the order backlog at the end of 2024 was GBP17.4 billion, up from GBP9.2 billion at the end of 2023. The order backlog for power systems was GBP4.8 billion at the end of 2024.
Rolls-Royce’s business profile reflects strong revenue and geographical diversification, and a high proportion of turnover sourced from service activities. The company’s financial risk profile has recently significantly improved relative to major peers and is now broadly consistent with strong investment-grade rated peers in the sector.
Rolls-Royce reported strong liquidity of GBP8.1 billion at the end of 2024, including GBP5.6 billion of cash on hand and an undrawn GBP2.5 billion revolving credit facility. Due to high levels of liquidity, the group repaid the EUR550 million bond and cancelled the remaining GBP 1billion UK export finance facility in 2024. A one-year extension option on the GBP2.5 billion undrawn revolving credit facility was exercised in October 2024, extending the maturity to November 2027.
Rolls-Royce is a leading UK-based multinational engineering business focused on the design, development, manufacture, and servicing of integrated power systems for use in the air, on land, and at sea.
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