Investment Management of Rolls-Royce Holdings - Case Study Example

Company analysis Name Institution affiliation Date Tear Sheet Name of the company: Rolls-Royce Holdings FIGI: RR Market Price: 747.50 GBP Date: 10th March,2017 Company Profile: Rolls-Royce Holdings is a company that majors in providing power and integrates this service with providing propulsions. The company’s operations are carried out in two major divisions: 1. Land and Sea Here the services are provided for the businesses based on nuclear and marine in line with the power systems. 2. Aerospace Here it focuses on providing the services to the businesses and activities in the defense and civil. In the aero business, there is manufacturing, marketing and servicing the engines that are involved in all the aero businesses that either work by using power systems or diesel. This company mainly has market for its products in Asian and European countries. Its volume of sales is seen to be growing faster in the Asian countries than in Europe especially in the mother country the United Kingdom. The company trades in the London Stock Exchange Market and over the last 12 months, the value of the company’s share has grown in value from 588GBP to 747.50GBP. The company’s customers get served well because the company has its offices evenly spread worldwide. One year price Chart Chart 1: One year price chart March, 2016 to March, 2017 for Rolls-Royce Holding Price Performance % Past month % Quarter % Half year % 1 year RR -1 -14 4 15 FTSE 100 6.71 13.52 -0.33 6.79 Risk Adjustment -1.45 -7.35 2.02 1.05 The risk adjustment = Portfolio return-Risk return) Standard deviation of portfolio return Key financial ratios and forecast Beta P/Book Op Margin Assets/Equity 1.43 6.60 -0.51 13.7 EPS DPS ROE PE DY Actual Dec 2016 -2.20 0.12 -117.28 N/A 1.75 Estimate Dec 2017 -3.74 0.10 -125.96 -5.03 1.68 Estimate Dec 2018 0.23 0.12 -16.2 2.8 1.53 Estimate Dec 2019 0.33 0.14 19.61 16.7 2.06 By comparable Price/EPS DPS/Price Price/Sales Price/Book Average Multistage growth DDM MRP Rf LT growth k Fair value 9.62 1.29 -5.8556 8.61 300.1 The company’s current beta value is = 0.8985 K= Rf+beta (E (rm)-Rf) = 0.0129+0.8985x0.0958-0.0129= 0.08608 Value of Growth rate= (D1 (1+gr))/k gt = (-2.20(1+1.75))/8.61x0.12 =-5.8556 Analysts’ recommendation: Buy Outperform Hold Underperform Sell Consensus Number 3 1 7 0 0 0 The fair value of the share calculated per 100000 shares gives us 300.1. This positive fair value informs us that at an assumed rate of 5%, this is the company whose shares will be admired by every potential investor. Therefore those who already have them must hold on them since they are promising and are more profitable in future (Kolosowski and Chwastyk, 2014). Introduction Rolls-Royce Holdings plc was incorporated in the year 2011 as multinational company based in the United Kingdom also said to be a British company. In the air craft industry, Rolls-Royce is the second largest that also deals in the energy sector and marine navigations (Kolosowski and Chwastyk, 2014). It has made numerous contracts in defense enabling its revenue growth to 71.6 billion pounds as at February 2014. The company’s shares’ performance in the London Stock Exchange is commendable and is also an important element of the FTSE 100 Index. It is among the thirty largest companies with a high market capital value of 22.22 billion pounds. The headquarters of Rolls-Royce are in London. This company runs with high level of efficiency due to minimal competition in the energy industry because of its quality products in the aerospace especially those used for defense. The company sells worldwide. Price performance and news analysis BAT. S (%) FTSE -100 (%) Numerical Calculation Risk adjusted (%) Dec-2015 -3.48 -2.49 -3.48 - (1.43x -2.49) 0.08 Jan-2016 22.34 0.82 -22.34 - (1.43x 0.82) 21.17 Feb-2016 0.44 1.80 0.44- (1.43x 1.80) -2.14 Mar-2016 -0.79 1.42 -0.79- (1.43 x 1.42) -2.83 Apr-2016 -7.54 0.31 -7.54- (1.43 x 0.31) -7.99 May-2016 14.94 4.70 14.94- (1.43 x 4.70) 8.22 Jun- 2016 11.17 3.44 11.17- (1.43 x 3.44) 6.26 Jul-2016 -2.65 1.68 -2.65 - (1.43 x 1.68) -5.06 Aug-2016 -6.49 1.80 -6.49- (1.43 x 1.80) -9.07 Sep-2016 1.54 1.03 1.54- (1.43 x 1.03) 0.06+ Oct-2016 -6.88 -1.99 -6.88- (1.43 x -1.99) -4.03 Nov-2016 -1.26 5.37 -1.26- (1.43 x 5.37) -8.94 Dec-2016 -0.07 -0.57 -0.07- (1.43 x -0.57) 0.74 Jan -2016 -100.00 -100.00 -100.00- (1.43 x -100.00) 43.00 News Analysis Date News Summary 28/02/2017 10:43:00 Pay Freezing The company’s wages come from the profits made. As at this date, a decision was made to cut down expenses by reducing salaries for 8,000 managers for the company to keep up making profits from the revenue earned. To avoid demoralizing the managers, they are given bonuses and their pay is promised to retain the normality in 2018given that the expectations remain the same. Heavy fines are promised to those who would be found in the bribery allegations. 02/17/2017 10:28:09 Decline in Shares The company’s commitment in producing quality products in different sectors within the energy industry makes it attractive to the investors because they know the risk is spread to designing, constructing and installing power generating systems for marine, civil war aircrafts and military aircrafts. This is why the value of the share has declined but the trading remains high. 03/02/2017 Costs on 787 Engine Problems The company is likely to incur costs due to the problems that the engines for Boeing 787 are facing. The company is likely to do something more at an extra cost so that to ensure these engines are as efficient as required and expected by the buyers. The cost for improvement in the manufacturing stages is likely to be lower than that in the repairs within the warrantied period. This will also improve the company’s image and the trust that the consumers have in its products otherwise, it may lose customers. 02/16/2017 2H Review Aerospace is the company’s largest source of revenue. This sector consumes the products like Airbus A350s which earn the company little profit and so with decline in the prices on the other products, the company faces difficulties in delivering them. The other Products affected in addition to the A350s are 777s, A380s, 757s, and 747s. With this trend, the decline in revenue is expected to be 367 million pound between 2016 and 2018. 02/15/2017 Cost cuts The company is reported to have made the largest loss ever and for this reason, it has to continue with cutting down its costs in order to recover the losses. The major causes of the loss are corruption scandal; high tax rates the pound plunge. The management team accepts 2017 as a challenging year but with the new executives in place, things are hopefully different in 2018 onwards. 11/16/2016 Fall in the Shares With the change in the approach to the accounting for the company, there was an expectation in the fall in profits by 900 million pounds in the following year and this indicates that the profits would fall by 6%. This change would cost the company till 2022. Valuation Multi-stage DDM EPS(GBp) DPS(GBp) ROE(%) Actual Dec 16 -220.08 11.70 -1.1728 Estimate Dec 17 -374.74 10.00 -1.2596 Estimate Dec 18 23.08 12.00 -0.162 Estimate Dec 19 33.09 14.14 0.1961 Analysts’ forecast Economic model ROE*b LT growth rate 10% 4% 1.19% Valuation K= = 0.0119 + 1.430 x (0.0920-0.0119) = 0.1155 or 11.55% g = ROE 2016 x b = -1.1728 x 1.055= -1.237 or -1.24% Analyst Forecast V0 Economic Model Forecast V0 DDM ROE Forecast V0 Valuation by Comparable PE DY P to Book P to Sales Rolls & Royce Holding N/A 12% 7.47 0.93 Sector median 21.85 0.62% 2.96 1.45 EPS DPS BVPS Sales PS Rolls &Royce Holding -2.20 0.12 Rolls& Royce Fair Value SML analysis The Abnormal Return is calculated as follow: Analyst’s Review The company has a nice coverage of the market for its products. This makes it have almost all positive values in all aspects. The change in the accounting system and the high cost on some products is the only hitch. Conclusion The share price for this company is seen to have increased from the previous years but from the look of things, the value is prone to dropping because of the business environment for the company is having several challenges that must affect its operations. From the analysis, the fair value is negative and this serves as an indicator that there are big losses in waiting for the company to incur. With the cut down on the cost, the company is on the right track to ensure that it makes profits despite the challenges (Kolosowski and Chwastyk, 2014). References Kolosowski, M. and Chwastyk, P. (2014). Economic Aspects of Company Processes Improvement. Procedia Engineering, 69, pp.22-130. Read More