Rolls-Royce’s high-flier has hard work to do

Most chief executives know the answer to this puzzler. How do you get a soaraway share price? Start with a bombed-out one. The latest proof? Rolls-Royce, up about 220 per cent last year to become Europe’s best-performing major stock.

Topping the Stoxx Europe 600 index has been the early feat of the new boss, Tufan Erginbilgic: the ex-BP exec who inherited a share price of 93¼p when he took the engine maker’s controls at the start of 2023 before piloting it through £3. His swift success brings obvious questions, too. How much of it was down to him? How much was luck? And how much extra is to come?

Plenty of new bosses begin their tenure with a spot of kitchen-sinking. But Erginbilgic didn’t need to bother with that. The business had been nicely kitchen-sunk for him: first by hapless or luckless former bosses, then by Covid. His predecessor-but-one was the profits warning machine John Rishton. And then came a chap with all the luck of Devon Loch — Warren East. His endless revamp was finally getting somewhere when it flew headlong into a global pandemic. The result? A rescue refuelling, topped off with an overly delayed £2 billion rights issue at a pitiful 32p.

So when Erginbilgic pitched up in melodramatic style, he had a right to label Rolls a “burning platform” that had been “grossly mismanaged” — the Trent 1000 engine fiasco under East that cost the group £2 billion being a case in point. Yet his timing was also impeccable: just as the long-haul aviation market bounced back, with the Ukraine war also giving Rolls’ power systems and defence wings a boost. On top, he inherited a leaner business, thanks to East’s 9,000 Covid job cuts.

Even so, Erginbilgic has brought far more focus. Rolls makes money at its core aerospace wing from selling and servicing engines and from simply having them in the skies, so-called flying hours. And, from the September before taking charge, Erginbilgic benchmarked Rolls against all its big rivals, not least GE and France’s Safran.

The upshot? He hit the ground running, removing unnecessary spending from 2023’s budget, while bringing a plausible strategy to boost margins. It allowed him to raise guidance at his first full-year figures last February, with investors quickly warming to the no-nonsense leader fresh from two BP turnarounds: its vast downstream operations and its lubricants arm.

At Rolls, Erginbilgic found a business that had spent 25 years chasing market share: the wrong emphasis when the group already had more than a third of it. Yet, in doing so, it had racked up £1.6 billion of lossmaking contracts: a figure he cut by £200 million within his first six months. To instil a culture focused on better pricing, he changed a hundred direct reports among senior management. So far, the price rises have not stopped Rolls winning orders, either, as a Turkish Airlines contract showed.

All this has given Erginbilgic the credibility to claim he can take 2022’s civil aerospace margins of 2.5 per cent to “15 per cent to 17 per cent” by 2027 — towards the likes of GE’s. All the same, hitting double-digit margins is the quick-win easy bit. The rest depends on improving operations, such as cutting engine maintenance.

His promise to crank up free cashflow from 2022’s £505 million to £3.1 billion by 2027 also has to be taken on trust, while dividend-free Rolls still has too much debt — £2.85 billion — and a credit rating that’s junk. A planned £1.5 billion of disposals will help. But on shares now at 298¼p, a forward earnings multiple of 29 times leaves scant room for error.

There are investment decisions to come, too, not least over modular nuclear reactors, while Rolls’ power systems wing makes diesel engines. Still, no question Erginbilgic is off to a flyer. And Rolls is trading better than it was when the shares were £1 higher in 2013. Don’t expect a rerun of 2023. But they should reach a higher altitude yet.

It’s all been gravy

Deck the aisles with loads of trolleys. Fa la la la la, la la la! Aldi and Lidl have each had a record Christmas. And who’s surprised about that? A cost of living crisis is made for the discounters — both of which got in quick with the bragging rights.

Aldi, where sales rose by 8 per cent to £1.5 billion in the four weeks to Christmas Eve, is styling itself “the UK’s lowest-priced supermarket”. Lidl, whose sales were up 12 per cent to some undisclosed figure, reckons it’s the “fastest-growing supermarket in the country”: a boast that would have added oomph if it had revealed how much it took.

Still, the price-cutting duo have done their bit to keep food inflation on a downward trend, falling for the eighth successive month to 6.7 per cent in December, on British Retail Consortium figures. And they’ve also highlighted something else: that their shoppers aren’t just on the hunt for cut-price staples.

Aldi’s were taken with its “alternative roasting joints” — the type you cook, not smoke — spanning such delights as the “wagyu rib joint” and “crackling gammon joint”. Lidl’s knocked back its Montaudon champagne, which apparently they prefer to Moët — at least in blind taste tests uncannily organised by Lidl. Whatever, with the pair setting the supermarket pace, none of Britain’s Big Four can afford to be a Christmas turkey.

Elon is ticked off

Happy new year, Elon Musk. First, Fidelity marking down its stake in his $44 billion purchase of Twitter, now X, by 71.5 per cent. Then, China’s BYD overtaking Tesla in the final quarter of 2023 as the world’s bestselling electric carmaker. Maybe Tesla would have struggled to keep up with the Chinese anyway. But it can’t help that Musk’s Twitter X-ploits saw him take his eyes off the road.