Let’s be honest — it does look good when you’re trading “shares under ten” and you’ve got Rolls-Royce in your portfolio. Despite the prestigious name, this stock fully qualifies as a true penny stock. Shares Under Ten is adding 2,000 shares to the portfolio at the current price of around 97 pence. 5-Year Share Price Performance – Rolls-Royce Holdings plc. Company Profile The Rolls-Royce brand is, of course, best known for its luxury cars — but many may not realise that the automotive business has long been owned by BMW. Rolls-Royce Holdings plc, founded in 1884 and headquartered in London, operates independently and focuses on engineering and power systems. The company is structured into four divisions: Civil Aerospace, Power Systems, Defence, and New Markets. The Civil Aerospace division designs, manufactures, and services engines for large commercial aircraft, regional jets, and business aviation. The Power Systems division develops and sells integrated power and propulsion solutions for marine, defence, and selected industrial sectors. The Defence division supplies engines for military transport aircraft, patrol aircraft, and naval propulsion. The New Markets division focuses on small modular reactors (SMRs) and new electric energy solutions, as well as maintenance, repair, and overhaul (MRO) services. The New Markets division is expected to play a key role in the global energy transition. Rolls-Royce is working to accelerate the launch of a new generation of mini nuclear reactors, a development fast-tracked by the ongoing energy crisis. While these SMRs aren’t expected to be operational before the early 2030s, management is eager to speed up the process, especially as Western nations seek to reduce dependence on Russian fossil fuels following the invasion of Ukraine.   However, engineers within the company have expressed frustration with the slow pace of regulatory approval in the UK, arguing that the government’s process for reviewing reactor safety is unnecessarily burdensome. Rolls-Royce aims to build SMRs that generate around 470 megawatts of power — just one-seventh the output of a large-scale nuclear plant, but at roughly one-twelfth the cost. The UK government has stated that the company’s technology is entirely new and must therefore undergo thorough scrutiny. Rolls-Royce engineers, however, point out that the technology is based on decades of experience in nuclear-powered submarines, a proven and extensively tested field.   Rolls-Royce cannot be acquired without government approval. The UK government holds a so-called “golden share,” which grants it special veto rights. This share does not offer profit participation or capital rights, but allows government representatives to attend general meetings and block specific strategic moves — such as takeover bids — that could affect national interests. Financials The UK’s most well-known engineering firm was hit hard by the COVID-19 pandemic, as airlines pay Rolls-Royce based on the number of flight hours logged by its engines. Given these extraordinary circumstances, FY2020 and FY2021 are not considered reliable indicators of the company’s underlying performance. In 2021, Rolls-Royce reported £414 million in underlying operating profit, a sharp turnaround from a loss the previous year. Growth in the Power Systems and Defence divisions contributed significantly to this financial improvement. However, the company also reported a free cash outflow of £1.5 billion from continuing operations in the same year. CEO Warren East commented on the results: “We have improved our financial performance, met our short-term commitments, secured new business, and made important strategic progress during the year. While challenges remain, we are increasingly confident about the future and the significant commercial opportunities presented by the energy transition.” Rolls-Royce’s credit profile has improved since the onset of the pandemic, and its exposure to the Russia-Ukraine conflict remains limited. As a result, Moody’s upgraded the company’s outlook from negative to stable. Pros Strong visibility and predictability of earnings Stable margins in the Defence division New CEO Warren East is aiming to bring fresh momentum to the company Cons Loss of market share in the business jet segment Disappointing cash flow development High R&D costs for new engine programmes Conclusion We are not particularly enthusiastic about this stock. While management certainly shows no lack of ambition, those good intentions have yet to translate into improved results. The company appears to be spread too thin across too many markets — and it’s simply not possible to be best-in-class everywhere. A more focused approach would likely serve Rolls-Royce well. Divesting non-core activities and doubling down on key strengths could strengthen both performance and investor confidence. The business jet division, for example, already faced structural challenges before the energy crisis, and its outlook remains weak. A sale of this unit might be a sensible move — especially if a solid price can still be secured. Back in August 2021, management announced it was open to selling assets such as ITP Aero, the turbine blade manufacturer, in an effort to raise at least £2 billion. Strategic asset sales like these may be necessary to unlock value and refocus the company. Third-Party Analyst Ratings for Rolls-Royce.   Globally, twenty analysts currently cover Rolls-Royce Holdings, and the consensus view is that the stock could gain around 28% over the next 12 to 18 months. At Shares Under Ten, we believe the share price has likely found a bottom, and we’re taking this opportunity to add the stock to our portfolio. Naturally, we’ll be monitoring developments closely. A takeover seems highly unlikely under current circumstances. Rolls-Royce plays a vital role in the UK defence sector, and the government holds a golden share that gives it veto power over any unwanted acquisition. In addition, ceding control over Rolls-Royce’s expertise in modular nuclear reactors would run counter to the UK’s long-term energy policy. Former Prime Minister Boris Johnson has been a strong advocate for nuclear energy and clearly sees the company’s know-how as a strategic national asset — especially amid the current energy crisis.Takeover rumours have surfaced before. Rolls-Royce was the subject of M&A speculation both in 2015 and again in 2020. However, following a series of profit warnings in 2015, the stock price fell by around 75%, and its recovery

Last year, SharesUnderTen scored big with this stock. We issued a Buy recommendation when the price was between €5 and €6. The stock rallied almost immediately, hitting our price target of €13 before the year was out. We exited a bit earlier, but investors who held on locked in gains of over 135% in just six months. Since then, the price has pulled back to below €8. But despite the drop, the recently released annual results were anything but disappointing. While revenue came in slightly below expectations, profitability beat estimates. More importantly, management shared a positive outlook for 2025. Cautiously optimistic in a choppy market, we’re adding 150 shares back into our SharesUnderTen portfolio. Not a bold bet—just a smart, calculated move with solid upside potential. HelloFresh share price performance over the past twelve months. Company Profile Founded in 2011, HelloFresh is one of the standout success stories to emerge from startup incubator Rocket Internet. The company went public in 2017 at €10.25 per share. Rocket Internet gradually reduced its stake after the IPO and fully exited in 2019, selling its remaining shares at around €8 each. In hindsight, not the best timing—since the stock went on a massive rally, peaking near €100 in 2021. Since then, however, the share price has dropped sharply as revenue growth has stalled (see Table 1). That’s not entirely surprising: with an estimated 50% market share, HelloFresh is running up against the natural limits of its core business. That’s not necessarily a bad thing—as long as profitability can be improved. And that’s exactly where management is now focused, launching several cost-cutting initiatives to boost margins. HelloFresh operates two divisions: Meal Kits and Ready-to-Eat. The Meal Kits division includes the original business: the well-known boxes with fresh ingredients that customers cook themselves. The Ready-to-Eat division is a newer and rapidly growing segment: pre-prepared meal solutions that require no cooking. Ready-to-Eat is currently growing at a rapid pace and already accounts for more than a quarter of total revenue. The expectation now is that the decline in the Meal Kits segment will stabilize, while the Ready-to-Eat segment continues to expand. In short: HelloFresh still has plenty of room for growth—just from a different direction than before.   Table 1: Results over the past 4 years. *Adjusted for one-off items   Outlook At the release of its annual results on 11 March, management announced that, thanks to ongoing cost-saving measures, normalized operating profit is expected to rise by over 65% in 2025, reaching €225 million. Normalized EBITDA is projected to come in at €475 million. However, the company also noted that a number of one-off expenses will be incurred due to restructuring efforts and investments aimed at improving operational efficiency. Table 2: Balance Sheet as of December 2024. *Including goodwill. **Including lease liabilities. Table 2 shows that intangible assets are valued at €0.4 billion. This implies that roughly €0.5 billion of tangible book value remains within equity, or €2.96 per share. Total debt amounts to €0.9 billion, while cash and cash equivalents stand at €0.5 billion. This results in a net debt position of €0.4 billion. Based on normalized 2024 EBITDA, the net debt/EBITDA ratio is just 1.1x. This means HelloFresh is far from its maximum borrowing capacity and can easily raise additional liquidity if needed. CEO Increases His Stake In September, it was announced that co-founder and CEO Dominik Richter privately purchased 1.5 million shares for a total of approximately €10 million. As a result, his ownership stake increased from 4.2% to 5.0%. We view this as a very strong signal—the ultimate insider showing confidence by making a personal, high-conviction investment of this scale. Share Buyback Program Throughout 2024, HelloFresh repurchased approximately 10.3 million shares under its share buyback program, at an average price of €8.00. Although the program was originally set to expire in December, it has been extended, with an additional €75 million allocated for further repurchases in 2025. At the current share price, this allows for the repurchase of 9 to 10 million shares, representing more than 5% of total shares outstanding. Given the depressed share price, we believe this is a highly effective use of capital. Valuation Forecast As shown in Table 3, based on 2027 estimates, HelloFresh is trading at a price/earnings ratio of 8.0x and an EV/FCF multiple of 7.8x. Table 3: Estimates through 2027   Conclusion: Worth Buying The valuation metrics just mentioned are suspiciously low for a market leader. That said, we’re confident there are no skeletons in the closet—after all, the CEO personally bought €10 million worth of shares last September. The only plausible explanation for the current discount is modest profitability. However, HelloFresh is in a unique position to benefit from economies of scale, and it seems only a matter of time before it outcompetes its rivals and significantly boosts its bottom line. We’re issuing a Buy recommendation. As a preliminary price target, we once again set €13 per share—and even at that level, we believe the stock remains undervalued. The author holds a long position in HelloFresh. Auteur heeft op moment van schrijven een positie in HelloFresh. Major Shareholders Active Ownership Corp SARL: 7.7% Dominik Richter (CEO): 5.0% Key Data Name: HelloFresh Ticker: HFG Sector: Food – Retail Exchange: IBIS (Germany) ISIN: DE000A161408 52-week low: €4.42 52-week high: €13.92 Share price: €7.78 Shares outstanding: 162 million Market capitalization: €1.3 billion Cash position: €0.5 billion Total debt: €0.9 billion Net debt: €0.4 billion Enterprise value (EV): €1.7 billion EV/revenue: 0.23x Tangible book value per share: €2.96 Price/tangible book: 2.7x Dividend per share: €0.00 Website: ir.hellofreshgroup.com