"Back to nuclear power", is the current motto in Switzerland. The government is in the process of overturning the ban on the construction of new nuclear power plants, which was passed seven years ago, on the grounds of "technological openness". Speaking of technology: it is above all the increasing digitalization with its high demand for electricity that poses a challenge for the future supply. Tech companies are now even taking care of the necessary energy themselves. Oracle, for example, is relying on mini-nuclear power plants for its new gigawatt-scale data center. This, in turn, is good news for Rolls-Royce. The British company is focusing on this type of energy generation in its "New Markets" business segment. The company has just successfully completed stage 2 of the Generic Design Assessment, an independent regulatory authority for the British nuclear industry. The final phase is now starting and the first reactors are expected to go into operation in the early 2030s.
Thanks to recent development successes, Rolls-Royce is the European leader in small modular reactors (SMR). However, innovative energy solutions have always been part of the Group's repertoire. The "Power Systems" division uses digitalization and electrification to develop clean and intelligent solutions for drives and power generation. The segment grew by 6% in the first quarter and contributed 23% to Group revenue. SMRs, on the other hand, are still playing a minor role, with low sales being offset by high development costs. However, these investments could pay off. According to Rolls-Royce, each small power plant will provide enough affordable, low-carbon electricity to power one million homes for more than 60 years. Rolls-Royce SMR is also currently involved in the selection process for Great British Nuclear SMR technology. "A successful outcome of this selection process this year will create and sustain thousands of highly skilled, long-term jobs and unlock huge export potential," it said in a press release.
While the small nuclear power plants are still a dream of the future, the "Civil Aerospace" and "Defense" segments will decide the weal and woe of the Group alongside the Power Systems division. Their developments are also impressive: The former, which accounts for half of Group revenue, grew by 27% in the first half of the year, with the operating margin improving by a whopping 5.6 percentage points to 18%. In the defense division, Rolls-Royce achieved growth of 18% and an increase in the return on sales of 1.9 percentage points to 15.5%. Overall, operating profit increased by almost three quarters, exceeding consensus estimates by an impressive 27%.
In the first half of the year, the company benefited in particular from demand for large jet turbines, of which 120 were delivered compared with 115 in the previous year, as well as from greater cost discipline. Saving costs continues to be a major topic. The ongoing efficiency program is expected to generate cumulative savings of more than GBP 250 million by the end of 2024. However, Rolls-Royce is also facing challenges: In addition to the difficult procurement of parts, which could cost GBP 150 to 200 million this year, the search for qualified workers is also a problem. According to CEO Tufan Erginbilgic, who took over the reins at the beginning of last year, the situation could last another 18 to 24 months.
However, the fact that Erginbilgic's restructuring plan is already bearing fruit can be seen not only in the current figures, but also in the forecast. For the first time since the pandemic, Rolls-Royce is holding out the prospect of a dividend. In addition, the engine manufacturer raised its profit and cash flow targets for 2024 after the first half of the year, with operating profit set to rise to GBP 2.1 to 2.3 billion, which is GBP 300 million more than previously. Free cash inflow is expected to be between GBP 2.1 and 2.2 billion, also a significant increase compared to the previous target of GBP 1.7 to 1.9 billion.
The share reacted to the company's current performance by jumping to a new all-time high. However, a recent sharp fall in the share price shows that the upward trend is not straightforward. The reason was an ordered inspection of the fuel hoses of certain Rolls-Royce engines of the Airbus A350-1000 fleet due to a fire at Cathay Pacific Airways by the European Aviation Authority.
The new Barrier Reverse Convertibles are not affected by a short low or medium-term sideways movement of the share. These products are designed to offer an attractive return even if share prices stagnate. In addition, the BRCs are equipped with conditional partial protection. With a term of one year, the new Barrier Reverse Convertible on Rolls-Royce on a CHF basis offers a coupon of 7.00% p.a., with the GBP version even offering a maximum interest rate of 10% p.a. In order to achieve the maximum return, the share may even fall moderately. It is important that the underlying does not touch the barrier at 69% of the initial level. There is no callable option in the structure, so there is no early redemption of the product.
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