Rolls-Royce hit by Societe downgrade to 'sell'

16th Jun 2014 09:26

Societe Generale has cut its recommendation for engine maker Rolls-Royce from 'hold' to 'sell', saying that earnings forecasts are at risk.The comments came ahead of the company's investor briefing in London on Thursday, at which senior management will discuss things such the group's strategy, capital allocation, M&A and future communication around guidance."We do not expect any groundbreaking new information to emerge. Indeed we expect some concerns over the outlook for 2014 earnings given management guidance of a strong second-half bias to the results and uncertainty over the group's interest in Wärtsilä."It was reported earlier in the year that the company was in talks with Finnish marine engineer Wärtsilä regarding a possible takeover worth nearly £8bn. Societe said any potential deal with Wärtsilä would need a "major equity element"."Our simulation of a Wärtsilä acquisition based on various bid premia indicates that a hypothetical deal would be value destroying under most scenarios. It would also dilute the group's civil aerospace business which is a major attraction of the group for many investors."This, along with worries that the company will struggle to hit its guidance for the full year, means that the stock will continue to underperform others in the civil aerospace sector, the bank said.Societe has cut its target price for the shares from 1,070p to 950p.The stock was 0.5% lower at 1,015p by 09:49.BC