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Investing.com -- S&P Global Ratings has upgraded Rolls-Royce PLC to ’BBB+’ from ’BBB’ with a stable outlook, citing sustained improvements in profitability and cash flow generation.
The rating agency expects Rolls-Royce’s free cash flow to increase to approximately £3.0 billion in 2025 from £2.6 billion in 2024. The company already generated £1.6 billion in free cash flow during the first half of 2025, driven by rising operating profit and growth in long-term service agreement (LTSA) balances.
Engine flying hours have recovered to 109% of 2019 levels, contributing to a £472 million increase in civil LTSA balances, net of risk and revenue sharing agreements. Working capital flows are also improving compared to last year, with better receivables collection and payable terms offsetting higher inventories needed to meet increased demand.
S&P Global Ratings anticipates Rolls-Royce will maintain a net cash position in the near term, with adjusted leverage remaining "comfortably under 1.5x" even if management pursues mergers and acquisitions or higher shareholder returns. Total shareholder distributions are expected to reach about £1.9 billion this year, including a £1 billion share buyback program and dividend payments.
The company’s adjusted EBITDA margin is projected to increase further in 2025 before stabilizing at approximately 18%-19% over the next two years. In the first half of 2025, the civil aerospace division saw its operating profit margins rise to 24.9% from 18% a year earlier, primarily due to strong aftermarket performance in large engines.
Rolls-Royce recently agreed to a bulk annuity buy-in of its defined-benefit pension scheme with Pension Insurance Corporation, which will reduce net assets by about £600 million. S&P views this as a derisking strategy that will eliminate potential fluctuations in pension-related debt adjustments.
The rating agency expects total capital expenditure of about 5% of sales, totaling approximately £1 billion-£1.1 billion, with about 30% likely to be capitalized development costs. Investment will focus on enhancing key engines and expanding capacity, including a new maintenance facility at Istanbul airport and expanded manufacturing capabilities in the U.S. for the power systems segment.
S&P acknowledged uncertainties related to potential U.S. tariffs but noted that tariff exemptions have been agreed between the U.S. and U.K. for aircraft, engines, and parts. The agency views the aerospace and defense market as less vulnerable to tariff impacts than other industries.
The stable outlook reflects S&P’s expectation that Rolls-Royce will maintain an adjusted EBITDA margin of 18%-19% over the next two years, with free operating cash flow reaching £3 billion in 2025 and up to £3.3 billion in 2026.
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