2025-06-09-花旗集团-劳斯莱斯（RR）_劳斯莱斯（RR.L）_小型模块化反应堆（SMR）决策的下一阶段定于周三——将选出1或2名决赛入围者（预计劳斯莱斯将是其中之一）_10页_291kb

Rolls Royce (RR.L) Summary

Core Content

The document outlines the current analysis and investment outlook for Rolls Royce (RR.L), focusing on the potential impact of the UK government's decision on Small Modular Reactors (SMRs) and the company's valuation and risk factors.

Main Points

• SMR Decision: The UK government is set to announce the next stage of the SMR selection process on 11 June 2025. Rolls-Royce is expected to be one of the one or two finalists, with the possibility of being the sole winner.
• Potential Value: The SMR project is estimated to be worth ~50p per share for Rolls-Royce, based on 16 SMRs at ~2bn each, excluding aftermarket and follow-on orders. This value includes potential export and replacement of fossil fuel opportunities.
• Market Reaction: There may be a minor negative share price reaction if two companies are selected, as the market may have priced in Rolls-Royce as the single winner.
• Valuation: The target price of £6.41 is based on a DCF model, using a 13% EBITA CAGR (2024–2029), 4% intermediate growth, 3% long-term growth, 9% WACC, and a ~117% operating cash conversion. This cash conversion is considered sustainable due to IFRS15.
• Current Price: As of 08 June 2025, the closing price is £8.85, and the expected share price return is -27.6%.
• Dividend Yield: The expected dividend yield is 0.6%, contributing to an expected total return of -27.0%.

Key Information

• Investment Rating: Neutral, based on the 12-month rating distribution.
• Catalyst Watch: The analyst has previously added and removed Catalyst Watch calls, indicating potential short-term price movements due to specific events.
• Conflicts of Interest: Citi Research has a significant financial interest in Rolls-Royce, and the analyst holds a long position in the company's securities.
• Research Analyst Affiliation: Charles J Armitage is the analyst responsible for this report, employed by Citigroup Global Markets Limited.
• Disclosure: The report includes several important disclosures regarding Citi's relationships with Rolls-Royce, potential conflicts of interest, and the nature of the recommendations.

Risks

The main downside risks to the investment thesis include:

1. Worsening economic conditions slowing the recovery.
2. Greater-than-expected deterioration in Defence revenues and margins.
3. Weaker-than-expected improvement in unit cost performance, especially in Civil Aerospace.
4. A weaker US dollar versus the British pound.
5. Durability issues on engines impacting LTSA costs.

Potential upside risks include:

1. Strong data centre growth (currently 5–10% of group sales).
2. A stronger US dollar.
3. Market valuing the cash flow bulge in 2025 from working capital release, although the analyst believes this is unsustainable.

Investment Rating System

• Investment Ratings: Buy, Neutral, Sell.
• Buy: ETR of 15% or more for non-high-risk stocks, 25% or more for high-risk stocks.
• Sell: Negative ETR.
• Neutral: ETR not sufficient to warrant a Buy or Sell rating.

Catalyst Watch

• Catalyst Watch: Indicates the analyst expects the share price to move in a specific direction over 30 or 90 days due to near-term catalysts.
• Upside/Downside Calls: These are separate from the fundamental equity rating and do not affect it.
• Catalyst Watch Expiration: Automatically expires at the end of the specified period, unless over-ridden by the analyst.

Analyst Affiliations and Disclosures

• Analyst: Charles J Armitage.
• Employer: Citigroup Global Markets Limited.
• Conflicts of Interest: Citi has a commercial relationship with Rolls-Royce, and the analyst holds a long position in the company's securities.
• Non-US Research Analysts: Not registered with FINRA and may not be subject to its restrictions.

Regulatory and Legal Information

• Disclosure Requirements: The report includes detailed disclosures about Citi's relationships with the subject company, potential conflicts of interest, and the nature of the recommendations.
• Investment Advice: The communication is not intended for retail clients in Israel and is not considered investment or marketing advice.
• U.S. Investment Restrictions: U.S. persons are prohibited from investing in securities of companies subject to Executive Order 13959.
• ETF Information: Any information on ETFs is for illustrative purposes only and should not be considered an offer to buy or sell.
• Investment Risks: Non-U.S. securities may involve risks such as limited information, less liquidity, and exchange rate fluctuations.

Conclusion

Rolls-Royce is a key player in the SMR selection process, with a strong potential to benefit from the project. However, the analyst highlights the importance of considering both the risks and the potential upside in making investment decisions. The valuation and investment ratings reflect a Neutral stance, with the analyst emphasizing the need for investors to evaluate the stock's expected performance and risk in light of broader market conditions and company-specific factors.