Rolls-Royce says defense, data centers and nuclear power the next phase of growth

Rolls-Royce deepening its exposure to AI infrastructure development, a British engineering group predicts that renewable energy systems could account for one-fifth of its power generation business by 2030 as data centers struggle to secure grid connections.

CEO Tufan Erginbilgic said on Thursday that the company is already discussing power systems and small modular reactors with hyperscaler data center operators, and expects to seek internal approval for a major customer framework agreement.

“At the beginning of next week, in [the] investment committee, we will sign another type of hyperscaler agreement,” said Erginbilgic on a call with analysts. “We are already taking orders for data centers [2028].”

Rolls-Royce is simultaneously benefiting from high global defense spending, which gives the company exposure to two major investment cycles in international markets: the defense boom and the creation of AI.

In power generation, Rolls-Royce sees a growing demand for both backup engines and gas engines for use as the primary power source for data centers.

As a result, it now expects 25% annual growth in electricity generation revenues to 2030, up from a previous target of 20%, and from less than 10% today.

Traditionally, Rolls-Royce mainly sold backup generators that sit idle until the power runs out. Now, AI data centers are increasingly looking for generators that generate electricity around the clock because they cannot be connected to the grid. For Rolls-Royce, that means not only more engine sales but years of extra, high-quality maintenance work.

The company also raised its full-year profit and cash flow guidance after strong earnings in the first half of the year, benefiting from strong demand across its aerospace, defense and energy systems businesses.

I FTSE 100 the company posted a modest operating profit of £2.5 billion ($3.3 billion) in the first six months of the year, up 46% from last year, while revenue rose more than 24% to £11.3 billion.

Rolls-Royce said it now expects full-year operating profit of between £4.7 billion and £4.9 billion, up from previous guidance of between £4 billion and £4.2 billion. It sees free cash flow of £3.8 billion to £4 billion, up from between £3.6 billion and £3.8 billion previously.

Shares rose as much as 6% and were trading 5.5% higher in midday trading, while the FTSE 100 traded flat, along with the pan-European. The Stoxx 600 index it was 0.4% higher.

The stock has risen more than 1,300% over the past five years, and 21% year to date, amid an increase in the company’s growth profile under Erginbilgic’s turnaround strategy.

Speaking exclusively to CNBC after the results, Chief Financial Officer Helen McCabe said orders in the company’s data center power business grew more than 50% in the first half of the year as operators continued to seek backup and on-site power solutions amid grid problems.

He also pointed to growing opportunities from higher defense spending, citing long-term commitments under the UK’s defense investment plan and NATO’s push for greater military investment.

“We had very good initial discussions with the new players [U.K.] government, and we fully support their focus on growth, defense, and the development of industrial production, and we look forward to supporting them in that and playing our part,” said McCabe, adding that the defense investment plan provides assurance of funding plans until 2030 and beyond.

While Rolls-Royce has traditionally been seen as an aerospace manufacturer tied to long-haul aircraft recovery, it is increasingly positioning itself as a supplier to both the creation of AI infrastructure through the division of its power systems and the global cycle of rearmament.

“Our transformation continues to deliver,” Erginbilgic said in a statement, adding that the company has “opened up new growth opportunities throughout the Group” and is building a strong and diverse portfolio.

Its defense business saw organic revenue growth of 17% in the first six months of the year, while underlying profit grew by 57%. That business is often “multinational,” McCabe said, while its energy systems division is also seeing an increase in governments using military spending and shorter investment cycles.

Power systems grew revenue by 28% organically and profit by 72%, driven by demand for data center power.

Its largest segment, civil aerospace, includes high-powered jet engines Airbus again Boeing airline, increased revenue by 29% and profit by 31%.