Rolls-Royce's 2022 Benefits From Contract Discipline, Improved Operating Environment

Narrow-moat Rolls-Royce reported higher 2022 revenue and operating profit than we forecast. The business benefited from a more favorable operating environment as well as tighter management of contractual terms and pricing. We maintain our GBX 105 fair value estimate. The company is working toward restoring its balance sheet and investment-grade rating. While not making it past that goalpost yet, Rolls-Royce was able to pay back GBP 2 billion in loans in 2022, leading to a net debt reduction to GBP 3.3 billion from GBP 5.2 billion. This debt reduction was possible due to positive free cash flow generation of GBP 505 million and more significantly EUR 1.8 billion in proceeds from the disposal of ITP Aero.