Analysts disagree over whether Rolls-Royce has 'turned a corner'
With the furore around Rolls-Royce's record loss due to new reporting standards having mostly subsided, Jefferies wondered whether "a corner has been turned", but others saw 2017 as just another transition year.
Aerospace and Defence
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Rolls-Royce Holdings
405.70p
17:15 25/04/24
The FTSE 100 engine maker reported a £4.6bn pre-tax loss after the new reporting rules led to it making a massive write-down after the fall in the pound.
Jefferies was most encouraged that civil large engine aftermarket revenues adjusted for contract accounting grew by 2% organically over the year after the 6% organic decline in the first half.
"Growth in these revenues is the key as we expect cash receipts from flight-hour payments to grow much faster than spend on overhauls," analysts said.
Also bolstering Jefferies 'buy' rating was the 2017 free cash flow guidance of £100m, with R&D and capex sustained, this makes clear that positive cash flow is happening for operational reasons, not due to lower investment.
"The turn may be slow in financial terms, but operationally and fundamentally it is faster, in our view," Jefferies said, pinning a 900p target price on the shares.
JP Morgan Cazenove's initial reaction was that "it is reassuring to see RR has stabilised the ship" but analysts said they wanted some time to fully analyse the results.
Goldman Sachs noted that while results were ahead of expectations, free cash flow performance was driven by working capital improvements both underlying and due to payment timing around the year end, which will reverse in early 2017, while cost savings are ahead of plan but only by £10m.
In its short flash note, Goldman analysts felt the outlook for 2017 was "mostly positive", pointing out that consensus forecats currently expect 2.7% revenue growth in 2017 versus reported 2016 numbers.
In a more detailed look, Kepler Cheuvreux said while the 2016 sales beat expectations by 2%, underlying profit before financing was 16% ahead and FCF was positive when most expected the opposite, the dividend was 7% below target.
In the light of strong 2016 results, Kepler hoped for "bolder" FCF guidance for 2017 rather than for a level similar to 2016, at GBP100m, which is circa £30-40m ahead of current consensus expectations "but no material change".
Kepler said the better-than-expected FCF performance "appears to be a one-off, rather than an indication that FCF generation is ahead of the expectation curve. Any indication that 2018 FCF could be ahead of the current consensus at £440m would be a share price driver.
"For now, 2017 appears to be another transition year," it concluded, maintaining its 'reduce' rating and 570p target price.