CNBC’s UK Exchange newsletter: With shares up 1,200%, Rolls-Royce’s CEO has lots to shout about

This report is from this week’s CNBC’s UK Exchange newsletter. Like what you see? You can subscribe here.

What do you do if you are the chief executive of a company whose share price has risen by more than 1,200% since you took the job?

If you are Tufan Erginbilgiç, chief executive of Rolls-Royce, you declare your ambition to make the company the largest on the London Stock Exchange.

To put that into context, even to modestly eclipse the current No. 1 AstraZeneca, Erginbilgiç, a former BP executive, would need to add another £124 billion ($167.34 billion) or so to Rolls’ market value — an increase of around 110% from here.

Investors will get a reasonable idea on what progress is being made toward that goal when the aero engine and power systems maker publishes full-year results later this week.

Rolls itself raised guidance for 2025 when, at its interim results last July, it pointed the market toward a full-year underlying operating profit of between £3.1 billion and £3.2 billion, up from the previous range of between £2.7 billion and £2.9 billion. Since then, at a trading update in November, it has said performance across the group was in line with expectations.

Yet this is a company — kept alive during the pandemic by Erginbilgiç’s much-underrated predecessor Warren East — that analysts and investors alike are now used to seeing beat expectations. Consensus forecasts on the Rolls website are ahead of current guidance.

As Agency Partners’ Nick Cunningham and Sash Tusa, two of the most experienced analysts following Rolls, put it in a note to clients last Friday: “Rolls-Royce raised guidance with … results last August and confirmed that guidance in its trading statement … so it would be surprising if it did anything other than mildly beat its guidance.”

The latest update suggested all three legs of Rolls — civil aerospace, defense and power systems — are enjoying robust growth.

In civil aerospace, the company’s best-known division, large new engine orders continue to come in — ones from IndiGo, Malaysia Airlines and Avolon were flagged in November — while large engine flying hours (Rolls’ Power-by-the-Hour engine maintenance program sees it paid a fixed rate for every hour its engines are airborne) have in the last year overtaken pre-pandemic levels and continue to grow.

In defense, demand is also healthy, supported by governments everywhere stepping up spending in response to heightened security threats. It was, perhaps, no coincidence that Rolls shares hit an all-time high last week, hours after it was reported that the U.K. government may seek to hit its target of spending 3% of GDP on defence earlier than the existing goal of the end of the next parliament.

And in power systems, Rolls is participating in the AI revolution, with data centres globally depending on its power generation systems. The company is also helping support grid resilience as governments seek to reduce carbon emissions from energy networks: in October last year, it launched a new modular solution for gas engine power plants aimed at improving security of supply in Germany. These plants are available as backup during periods — the Germans call them “dunkelflaute” or “dark doldrums” — when wind and solar energy generation drops due to gloomy weather.

All three divisions should continue to enjoy tailwinds. In civil aerospace, for example, Rolls is benefiting as manufacturers Airbus and Boeing struggle to deliver new aircraft at the pace the market requires — obliging airlines to keep flying old planes (and their engines) for longer.

In terms of future growth, possibly the most excitement presently surrounds the company’s work in nuclear energy.

A Rolls-led consortium, which also includes the Czech utility CEZ Group, was selected by the U.K. government in June last year — following a two-year contest in which it saw off competition from Westinghouse, Holtec and GE Hitachi — to build three plants powered by small modular reactors (SMRs).

The technology, based on Rolls’ work providing power plants that propel the Royal Navy’s fleet of nuclear submarines, has also been selected for use by the Czech government and has made the final stage of Sweden’s process to select a nuclear technology partner.

While the Rolls-Royce SMR business is currently consuming capital, Erginbilgiç said last August he expects it to be profitable and free-cash-flow positive by 2030, adding: “We have unique capabilities in nuclear … and a highly differentiated position in a growing market.

“Therefore, we expect the value of this business to grow significantly from now.”

That may not be the only extension of existing capabilities. The worst decision made by Rolls’ management in recent times was the 2011 decision to stop making engines for narrow-body or so-called “single aisle” aircraft — only for the category to see huge growth as low-cost short-haul air travel expanded rapidly around the world.

Erginbilgiç confirmed at last year’s Paris Air Show that he would like Rolls to return to the market, but indicated it would probably do so in partnership.

So investors will be seeking further details on this and on progress being made toward obtaining taxpayer subsidies to support development.

Some airline industry executives, including József Váradi, the chief executive of Wizz Air, have indicated they would prefer Rolls to go it alone.

Others simply want Rolls back.

Michael O’Leary, Ryanair’s chief executive, said last month: “There’s only two suppliers in the world on short-haul engines at the moment — GE Safran and Pratt & Whitney. And Whitney are struggling to repair the engines that they’ve already made.

“We need someone like Rolls-Royce to come back into that marketplace.”

All of which means these are exciting times for one of the most prestigious of Britain’s blue-chip companies.

The problem for would-be new investors is that a lot of this is already priced into the share price. Cunningham and Tusa suggest that, on a 2028 price-to-earnings multiple of 36x and an enterprise-value-to-sales multiple of 4.6x, the share price may have “overshot.”

Others would argue, given Rolls’ near-death experience during the pandemic, this is not a bad problem to have.

— Ian King

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Coming up

Feb. 27: GfK consumer confidence for February

March 2: BoE mortgage approvals data for January

March 3: Chancellor Rachel Reeves presents the Spring Statement