Proof of what can be done with a “burning platform”. Was it really only in January last year that Tufan Erginbilgic turned up at Rolls-Royce to claim that the business was ablaze, having been “grossly mismanaged” for years?
He must have brought along the world’s top sprinkler system because just 14 months later, the business is flying: underlying operating profits up last year from £652 million to £1.6 billion, operating margins doubling to 10.3 per cent and record free cash flow of £1.3 billion. As for the shares, they’re up from 93p to 356.8p since he took the controls, including the latest 8 per cent bounce on the results. Anyone would think he’d rebranded the engine maker as a whizzy AI stock.
So, obvious question: is this down to Erginbilgic or has he just timed his arrival to perfection, lucking out in particular on the post-Covid upswing in aviation? Having heard Erginbilgic slag off his inheritance, one former Rolls boss wrote last month to The Times. Sir John Rose, who ran the group from 1996 to 2011, argued that the “biggest impact” on Rolls lately had not been the new chief “but the actions of his predecessor Warren East, the strong US dollar, the recovery in flying and the strong performance of diesels and defence”: a view he still holds.
Rose must have at least a bit of a point too. The civil aerospace wing has pulled round from 2020’s £2.5 billion loss to an £850 million profit, up almost 500 per cent last year. And surely that can’t be down to the efforts of one man. Yet, there’s also evidence Erginbilgic’s making a real difference, surprising analysts again with operating profits 13 per cent above consensus forecasts and free cash flow 27 per cent ahead.
Take “engine flying hours”, where Rolls gets paid for having its engines in the skies. Yes, they recovered last year from 65 per cent of pre-Covid levels to 88 per cent. But, as Agency Partners analysts noted, that was only “slightly ahead” of forecasts. So, “it seems likely that pricing and other terms of business were the main drivers of the strong profits”.
Advertisement
Indeed, the power wing, making diesel engines for ships and tanks, and the defence arm supplying UK nuclear submarines, were bigger outperformers. As Agency Partners put it: “This across the board performance suggests management actions, not just external recovery, play a large part.”
Ask Erginbilgic how he’s revved up Rolls and he’s disappointingly vague. Yes, he’s changed the head of all three divisions and half their direct reports. But he speaks of “commercial optimisation, cost efficiencies and progress on our strategic initiatives”. What’s that? Well, he says he’s “renegotiated” contracts with “every key” civil aerospace customer, impressing on them that some “do not reflect the value we bring to the table” and that there is a “win-win solution”. He’s also “consolidated indirect spend” across Rolls, saving “£34 million” on such things as “chairs and tables”.
None of that looks enough to have had such a financial effect. Yet, the word from within Rolls is that he’s already changed the culture, forcing a re-evaluation of the profitability of every engineering decision. On top, he’s convinced the market to believe in Rolls’ guidance — now shooting for up to £2 billion operating profits and £1.9 billion free cashflow this year. After the goofs of the past, that’s a feat in itself.
London’s big loss
Some companies were never a natural fit for a London listing. Take Indivior, the drugs outfit treating opioid and other addictions. If it hadn’t been a 2014 spin-off from the UK-quoted and Slough-based Reckitt, the US stock market would always have been a likelier home.
Alongside Indivior’s Virginia HQ, about 85 per cent of its business is in America: home of the crisis that saw 112,127 overdose deaths in the most recent 12-month period, 55 per cent up on 2019. Of those, 85,056 were caused by opioids, up 67 per cent over the same timescale mainly due to the synthetic sort, like fentanyl, which is more potent than heroin.
Advertisement
That, sadly, is Indivior’s market. And once it secured a dual Nasdaq listing last June, the writing was on the wall for London. Its boss, Mark Crossley, now plans to make the US the primary listing, with half of its investors based there, up from “40 per cent” since its Nasdaq quote.
Still, it’s a comedown for London that it’s losing out when Indivior is starting to perform. Over the years, it’s brought more lows than highs, including $1 billion or so of litigation settlements and the jailing of Shaun Thaxter, Crossley’s predecessor. But, now shot of most litigation, the focus is on its treatments, with the monthly injectable drug Sublocade seeing net revenue growth of 54 per cent last year and Perseris, for often related schizophrenia, up 50 per cent. On top, Crossley’s guidance for this year helped lift the shares 22 per cent to £16.60. A mere secondary listing for that sort of business is always a bit of a downer.
The odd goodbye
Another day, another mispricing gem from the UK market. The business in question? Marlowe, the outfit backed by 12.3 per cent investor Lord Ashcroft and run by Alex Dacre, the son of Paul of Daily Mail fame. It’s sold its governance, risk and compliance software biz to Inflexion for £430 million, with Dacre junior divesting himself, too, to join the assets in private equity land.
What’s so special about that? The assets accounts for 20 per cent of Marlowe’s sales and 40 per cent of adjusted ebitda. But the sale price, “on a debt free, cash free basis”, equated to 121 per cent of the group’s market value – at least before the shares leapt 18 per cent to 502p. Yes, Marlowe, built via an acquisition roll-up and trading above £10 in early 2022, has had its disappointments. But you don’t have to be a detective from a Raymond Chandler novel to spot something’s up here.
