Rolls-Royce shares receive important boost from FTSE 100 peer

A bullish update on aerospace industry demand from Melrose Industries cast a positive light on rival engineer Rolls-Royce ahead of its own big announcement tomorrow. Our City writer explains.

A flying start to the year for GKN Aerospace owner Melrose Industries (LSE:MRO) today fired up interest in Rolls-Royce Holdings (LSE:RR.) shares ahead of tomorrow’s eagerly awaited AGM trading update.

FTSE 100-listed Melrose reported trading materially ahead of expectations for the first four months of the year, with significant growth in revenue, profit and margin.

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Its engines division, which is a tier 1 supplier of components for civil and defence airframe platforms, was the driving force behind the success as revenues jumped 28%.

Melrose also upgraded its full-year guidance and confirmed plans to be a pure play aerospace business, after April’s demerger of GKN’s automotive and powder metallurgy operations created a new FTSE 250-listed company called Dowlais.

The aerospace focus marks a step change for the company, which floated on AIM in 2003 and made its first acquisition two years later. Since then Melrose has created significant shareholder value through its 'Buy, Improve, Sell' strategy, leading to FTSE 100 status by 2012.

The priority for the next 12 months will be on maximising the quality and potential of aerospace, which Melrose believes will enable it to buy back a proportion of its shares each year.

The update and refreshed strategy helped Melrose shares to rise 5% to 445p, while the read-across from GKN’s positive update on aerospace industry demand also boosted Rolls shares.

Rolls stock rallied over 2% to 155p, which compared with the 107p seen before new boss Tufan Erginbilgic presented better-than-expected results on 23 February.

Rolls is due to post a trading statement tomorrow, when the City will be looking for an update on current guidance for large engine flying hours at 80%-90% of their 2019 pre-Covid level.

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Confidence on this front has been boosted by strong trading updates from the likes of British Airways owner International Airlines Group and Lufthansa, as well as more signs of recovery in the widebody market in China and across Asia.

Bank of America recently raised its forecast for engine flying hours to 92% amid signs of a “very strong performance” so far in 2023. It also lifted its price target to 190p.

Today’s strong update by Melrose today led analysts at Investec to upgrade their price target on the GKN business by 15p to 515p, while JP Morgan upped to 500p ahead of Melrose giving more details on the longer-term aerospace outlook at a capital markets day on 17 May.

Melrose today forecast adjusted earnings between £495 million and £515 million for 2023, with substantial further growth expected in future years. Its GKN Aerospace operation is a risk-and-revenue-sharing partner on 19 engine platforms, including those powering the narrowbody A320ceo.

Chief executive Simon Peckham added: “Aerospace has huge embedded value and an EBITDA of £1 billion is achievable within the next few years, much of this coming from the premium Engines business.”