Monday, April 20, 2015

Bought Rolls Royce (RYCEY)

The idea for buying this is clearly explained by Bronte Capital here and here.    It depends on the success for the A350, the B787 Dreamliner (Rolls has about a 30% engine share) and the upcoming A330neo (expected end 2017).  The main competitor for the A350 is the B777X, expected in 2019.

Based on their order numbers for the Dreamliner (~300 planes), A350 (~800 planes) and the a330neo (~140 planes), with Airbus’ expected A350 production rate, I’m guessing a large ramp-up in 2017-2019 (190 planes in 2017, 240 in 2018 and 2019).  The company provided slightly more optimistic charts:

(Source - June 2014 presentation - p21&22)

Roll’s civilian aerospace 2014 income is about 50% recurring (services) and 50% project based (OEM).  The industry is a simple duopoly.  The only risk I can see is something unexpected happening (e.g.: SARS, 911, financial crisis), or the end of a typical expansion cycle where everyone realises too late that the’ve all added excess capacity.  This would affect Roll’s OEM revenue as orders are cancelled, and their service revenue (power-by-the-hour) shinks as revenue/profits are recognised based on expected flight hours.

Underlying PBT guided for 2015 was 1.4-1.55bn pounds, giving at the lower bound, an EPS (before tax) of 73.9p, or EPS (after tax) 56.2p.  At 900p, thats a PE of 16.

The idea of RR selling its under performing assets (1), (2) is unlikely due to the UK government’s golden share.

For me, the potential reward os worth the risk, after buying I'll still be 78% in cash.  Hard to find anything to buy.

Bought 304 RYCEY ADRs at USD 73.0955.  Total cost was USD 22,229.98.

Paperwork stuff:
  • One ADR (RYCEY) equals 5 LSE shares.
  • Later on, check my dividends to make sure the are not taxed: UK shares should not be, neither should their ADRs. Check the fees BNY Mellon charges (should be 1-3c/share) for the dividend payments.
  • Held in my Schwabb account.  Should be a long term holding.  Counterparty risk through Schwab and BNY Mellon.  No way to avoid this for UK shares unless opening a CREST acct.

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