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It’s tricky to modernise a company that owns two working Spitfires.
That’s the task now facing Anita Frew, Rolls-Royce chair designate. Frew will take over when Sir Ian Davis retires in October after nine turbulent years in the role. The shares have dropped by more than 70 per cent during his tenure.
Carrying the flag for British engineering excellence meant Rolls’ Battle of Britain fleet was saved, while almost a fifth of its workforce exited. Such patriotism counts for little among investors, however, who tend to see the jet-engine maker as a failed experiment in vendor financing. Covid was what fully exposed the fragility of Rolls’ pay-as-you-fly model, which is designed to smooth out demand over economic cycles yet never seemed capable of delivering much in the way of cash.
As a result, all conversations about Rolls loop back to debt. It’s a mystery then why Davis and Warren East, his chief executive since 2015, held off until October to apply a balance sheet fix. By the time of its rescue rights issue Rolls was already the European aerospace sector’s worst performer, lagging behind peers by about 60 per cent.
Delaying the inevitable meant that Rolls could only tap investors for £2bn and had to price the shares at a 75 per cent discount. It raised enough to keep the lights on but net debt remained an uncomfortable £3.6bn at the end of the year after a £4.2bn cash outflow. Add in the operator leases, customer advances, cash provisions and pension liabilities and the total debt balloons to more than £17bn.
Frew is taking on a business with no quick fixes. Positive free cash flow in 2022 is the target but East had to step back current-year guidance in December and again in January. Restrictions affecting wide-body long-haul flights, Rolls’ key market, have barely changed since then. Engine flying hours hit just 40 per cent of 2019 levels in the first four months of 2021, meaning that Rolls’ base case of a recovery to the 55 per cent level this year looks a real stretch.
Perhaps it just needs patience. Air traffic will recover to support break-even eventually and, when it does, Rolls ought to benefit from East’s right-sizing efforts. Liquidity is healthy enough to wait, assuming that Rolls exits the crisis fitter than it entered. Stoicism has rarely proved the right investment strategy, however. It tends to overlook the complications of running a national treasure.
Going postal
Stamp collecting on the blockchain? Maybe! Stanley Gibbons, a company founded in the same year as Nikola Tesla was born, has jumped on the digital token bandwagon.
Gibbons this week paid $8.3m at auction for the only known example of a British Guiana One-Cent Magenta using money borrowed from Phoenix Asset Management, its majority shareholder. The stamp will go on display at Gibbons’ showroom at 399 Strand, London, while Graham Shircore, chief executive, figures out what to do next. “The concept is to do something,†he told the Washington Times.
Handily, the team that built a website for Phoenix’s other hobbyist portfolio company, Hornby, has been putting together a digital token trading platform. With its help, Gibbons is investigating how to enter a market that has boomed over the past year, particularly in niches such as Pokemon cards, Yeezy trainers and sports memorabilia.
Will the philatelists be as keen on virtual keepsakes? It’s a gamble. An older demographic is more likely to remember the failure a decade ago of art exchanges such as Splitart and A&F Markets. For them, anything involving fractional ownership tends to get lumped in with vintage hustles such as timeshares and lunar deeds.
And in the end, why bother? Uncertainties around provenance and reliability that tokenisation can solve are also the reasons why Gibbons exists. It has a royal warrant, a trading history that begins in 1856 and an anti-money laundering process that’s presented as a feature rather than a bug. It’s not yet clear what Gibbons could do digitally that it cannot do already via a fancy certificate in a leather sleeve.
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