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Credit ratings agency S&P Global has raised its assessment of aerospace engineer Rolls-Royce, citing the company’s improved profitability, robust cash generation, and ongoing debt reduction.
The upgrade follows Rolls-Royce’s (LSE:RR) half-year report released on August 1, which revealed that operating profit margins had increased to 14% from 9.7% the previous year. This growth was largely attributed to enhancements in the civil aerospace division, driven by greater contributions from aftermarket services.
S&P Global noted that while significant margin growth in the civil aerospace sector might plateau in the coming years, other areas of the business could potentially contribute to further margin improvements. Consequently, the agency has revised its profit forecasts for Rolls-Royce for 2024 and 2025, alongside its projections for free cash flow.
The upgrade in free cash flow is attributed to a rise in engine flying hours, which boosts long-term service agreement balances and increases shop visits in civil aerospace. This is complemented by ongoing pricing strategies and measures implemented under the company’s Transformation Program.
S&P Global also highlighted that with the company’s balance sheet expected to continue strengthening, Rolls-Royce’s adjusted debt-to-EBITDA ratio is anticipated to remain “well below” 1.5x over the next two years. As a result, the agency has upgraded Rolls-Royce’s issuer credit ratings to 'BBB/A-2' from 'BBB-/A-3', and has also raised the rating on the company’s senior unsecured debt to 'BBB' from 'BBB-'.
The positive outlook indicates that there could be potential for a further rating increase within the next 18 to 24 months if Rolls-Royce sustains strong performance and maintains financial policies that support a higher credit rating, even in less favorable market conditions.
Following the upgrade, Rolls-Royce shares saw a 0.9% increase, reaching 496.7p by 10:39 BST.
