Rolls-Royce cash-flow confidence impresses analysts

3rd Aug 2018 13:32

(Sharecast News) - Rolls-Royce has clearer skies ahead, analysts at Societe General, UBS and Deutsche Bank said on Friday, encouraged by the engine maker's confidence in delivering strong cash flows despite the high costs from the Trent 1000 engine issues.A day earlier the FTSE 100 conglomerate, which reported first-half results under its newly slimmed down three-division structure, where civil aerospace revenues rose 26%, power systems by 13% and defence was pretty much flat.Despite taking a £554m charge to cover problems with its Trent 1000 model, CEO Warren East reiterated his £1bn free cash flow target for 2020.SocGen, which upgraded the shares to 'buy' from 'hold', said: "The confidence and guidance on cash is certainly encouraging, and we raise our estimates to partially reflect this. We think the targeted £1bn cash by 2020 is achievable as the £200m higher-than-expected spend on Trent 1000 remedial actions should be offset by stronger performance in Defence and Power Systems."Having long argued that despite the setbacks with the Trent 1000 engine, the shares under-value the core business amid strong market momentum of civil aerospace and defence, UBS made limited changes to its overall free cash flow estimates post the results.USB, which reiterated its 1,130p share price target and 'buy' rating, noted that the variability of aerospace profit "remains high" under the IFRS 15 accounting rules, with circa £4.1bn worth of profits not recognised in the P&L, while cash flow surprised positively in defence and in aerospace."In 2H18 we would expect good cash inflow from PS, and a small cash positive in civil. Trent 1000 is a large drag, which we think the market will strip out once stabilised," UBS analysts added."We believe the market is not yet comfortable enough with the 787 to treat it as a one-off. We would raise the analogy with the A400M where the market started to strip its large cash costs out of Airbus' underlying FCF once the airplane performance improved and incremental charges were reducing."Deutsche Bank, sticking with its 'hold' stance, increased its TP for Rolls Royce from 880p to 900p as analysts saw an improved outlook for power systems and defence on the back of the results, as well as lower central costs, increasing full year sales forecasts for power systems for this year and next, while trimming their forecasts for defence margin declines. While the 900p target implies some downside to the last close price of 1058p, so a 'hold' rating was reiterated with the addendum that, "With Rolls expensive on near-term multiples, one still has to look beyond 2020 for valuation to become more appealing."