Rolls-Royce Holdings (lon:rr)
Rolls Royce – Share Issue Being Ignored?


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Title: Rolls Royce – Share Issue Being Ignored?
Company: RR - Rolls-Royce Holdings
Share Price Then: 195p
Author: Ian Smith
Date: Fri 16 Oct 2020
Comments: Over the last 5 years Rolls Royce shares have been trading between around 550p to 900p and are currently at around 190p after dropping to around 110p after the announcement of a share issue on the 3rd of October.

This share issue is planned as a 10 for 3 issue meaning that post issue there will be 4.33 times as many shares in circulation as prior and will have raised around £2bn.

So the new number of shares would adjust the 5 year price range to 127p to 207p, yes the company has an extra £2bn of cash. But this is already spent or allocated to things like the hedged transactions for expected engine maintenance that never appeared due to planes being grounded or are going to be grounded.

There has also been a £2bn bond issue due for repayment in 2026 and 2027 as well as a new 2 year loan for £1bn, meaning that £5bn has been raised.

The bonds are subject to the rights issue being approved by shareholders scheduled for the 27th of Oct.

With the current share price of 195p the company’s market cap is £3.77bn and the new shares are to be issued at 32p, so to my way of thinking the shares are currently in effect trading at the top of their range.

Whilst Rolls Royce’s survival is almost certain, the company is too important for the UK Government to allow it to fail, if state aid is needed it will be at the expense of the share holders.

So a post issue price of around 100p seems inevitable along with a possible short term spell at say 60p as the new rights issue shares are dumped by those who want to restrict their commitment to RR.

The price could be even worse as civil aviation is a very inefficient market place, once a aeroplave has an engine there is almost no way to change it. Most people expect a massive contraction in civil aviation for a quite a while and which airlines will go broke or get bought is unknown.

In this reduced market place which planes with which engines are flying is going to based to a large extent on which contract is the most expensive to get out off.

Airline 1 buys out Airline 2, Airline 2’s planes are more expensive to fly per mile and have a higher cost when they aren’t flying so Airline 1 leaves its cheaper to fly and cheaper to keep on the ground planes on the ground and flies Airline 2’s planes.

Does this mean that RR powered planes will be the ones grounded or flying?

Yes I have ignored the rest of the RR group, mainly because there is no reason to believe that they will be able to cover the losses from civil aviation or suffer unexpectedly.

You can produce all sorts of charts to justify the current price, but to me buying now it looks like a very high risk long term hold.
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Previous Commentaries On Rolls-Royce Holdings
Date Share Price Author Commentary
Fri 28 Aug 2020256pIan Smith

Rolls Royce – Big Bad News

Rolls Royce’s share price tumbled from around 600p-800p at the start of the year to 300p with the COVID news and todays bad news brings it down to a post 2007/8 collapse low of 250p.

The grounding of the most of the world’s airlines has been crippling for RR’s civil aviation division with large engine deliveries and flying hours both down around 50% in H1 and engine flying hours in down by 75% Q2.

The other divisions have issues but nowhere nearly as bad and considering the business overall they can be reasonably be ignored here, Power, Defence and ITP are showing revenue down less than 10%.

As a result of the lack of aircraft flying the Civil Aviation division is to lose 9,000 jobs from a workforce of around 24,000 which also means empty factories and equipment no longer needed.

This means that the company will be making so many changes that the accounts are going to be pretty close to meaningless to a small investor as such huge values exist as one or two line items are going to hang radically.

What seems odd is that currency hedging seems to be one of the biggest issues forcing the company’s hand.

There is a £1.46b loss in USD hedging from reducing the hedged order book from $36bn to $26bn, the company has committed to fixed rate transactions that are now not going to be taking place. This cost is unevenly spread over the next 7 years £88m(2020), £324m(2021), £327m(2022) and then £718m across 2023-26.
This seems to be a genuine cash loss, but also one that is variable up-front recognition of future FX cash settlement costs.

There is also £2.64b in non cash valuations of foreign exchanges for transactions that are expected to take place.

To get through this downturn the big available loan facilities are a £1.9b RCF with zero drawings and an undrawn £2b loan along with £4.1b of cash. There are loan repayments of $1.25b of bonds due in 2021 and the £1.9b RCF expires in Oct 2021 and it is forecast that much of that will be used by then.

To offset some of this parts of the business are to be sold off In order to retain a solid financial base businesses are to be sold off to raise £2bn including ITP Aero which makes parts of engines.

Added to the woes the Trent 1000 engines designed for the Boeing 787 have been an issue for the company, with a costs of around £2.1bn overall. The big issues were with turbine blades in three different sections of the engine, it’s best to look these up elsewhere as a one line summary would be too simplistic.

They were all reliability issues initially grounding aircraft then requiring replacements earlier than scheduled, the costs of which RR had to pick up. Brining all the engines up to the latest spec is still ongoing but as they are related to time in service there are no Aircraft On the Ground (AOG) at present. This is due to either spare engines being available or reduced flying recently meaning that the flying hours limits have not been reached.

So much now depends on how soon planes get flying again and how many airlines go broke, two airlines struggling with half empty planes generate twice as much revenue for RR as one airline flying a fully loaded plane.