Rolls-Royce (RRU1) AI Stock Analysis

Company Guidance

Rolls‑Royce guided to 2026 underlying operating profit of £4.0–4.2bn and free cash flow of £3.6–3.8bn (noting a continuing supply‑chain headwind that should be gone by the midterm), with net LTSA balance growth broadly similar to 2025, large‑engine flying hours of 115–120% of 2019, shop visits of 1,480–1,550 and an expected supply‑chain cash drag of c.£150–200m; they flagged higher net investments, an outflow on provisions and cash tax c.£200m higher versus 2025. For the 2028 midterm they upgraded targets to operating profit £4.9–5.2bn, operating margin 18–20%, free cash flow £5.0–5.3bn and return on capital 23–26%; divisional midterm margins include Civil Aerospace 21–23% (installed fleet growth 6–7% p.a.), Power Systems 18–20% (OE growth in Power Gen and Governmental ~20% p.a.), and Defence 14–16%. They expect net LTSA balance growth of c.£0.8–1.2bn to midterm with large‑engine flying hours rising to 130–140% of 2019 and shop visits peaking in 2026 then falling to 1,300–1,400 in 2028, assume a blended FX of ~$1.33/£ (vs $1.44 in 2025), and built in material LTSA margin upside (contract margins up ~19pp 2022–28 with an incremental +2pp contract and +8pp LTSA improvement vs prior targets); capital returns include a £7–9bn buyback program 2026–28 (£2.5bn in 2026 including £200m already executed) alongside a 2025 final dividend of 5p (full year 9.5p, 32% payout) and a commitment to return >75% of FCF 2026–28.