Rolls-Royce has won another US military contract. Questor says buy.
Rolls-Royce
918p
Questor says: Buy
Dispelling some concerns about global defence spending, on Friday Rolls-Royce won a $52.2m (£32.6m) contract with the US Marine Corps to repair and maintain engines.
Of course, military spending is currently going through a squeeze, but budgets are unlikely to wither away completely.
Rolls, which generated a fifth of its sales in 2011 from defence, should escape the worse of the cuts. The turbine maker provides critical equipment and benefits form long-term contracts to maintain the engines and replace their parts. Indeed, 53pc of group sales is generated by such recurring services.
Demand for military engines over the next 20 years could be around $155bn, Rolls estimates, and for services and support equipment $260bn.
However, civil aviation looks set to boom. According to data from the International Civil Aviation Organisation (ICAO), some 2.9bn people used air transport in 2012. The highest growth was seen in the Middle East and the ICAO expects the industry will see 6bn people flying each year by 2030.
There should also be good growth in Rolls’ marine business, where it makes systems for offshore oil and gas, merchant and naval vessels. Its power generation business, which designs and manufacturers turbines for nuclear, oil and gas power plants also has strong prospects.
Rolls is currently facing a probe by the Serious Fraud Office looking into allegations of bribery in Asia. It is impossible to predict the outcome of any such investigation. It is something of which investors should be aware but it should eventually be resolved and Rolls is co-operating.
The shares are trading on a December 2013 earning multiple of 14.2 falling to 13. The prospective yield is 2.4pc. The shares are a buy.
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