1320 Wednesday 12 December 2018

In a statement this morning, Rolls Royce announced that they aim to hit the upper half of estimates on their profits. They forecast an operating profit of around $400m and a free cash flow of approximately £450m despite headwinds that some analysts had predicted. The company that sees its highest numbers coming in from their airline engines cited more flying hours bringing in revenue through maintenance and related activities. Despite the positives, RR has seen issues with their Trent 1000 engines that had caused the grounding of some Boeing planes and saw delivery of new engines 10% down from estimations. On the subject of current and future deliveries, the firm stated “This reflects supply chain challenges that are affecting the whole civil aero engine sector and also early stage production ramp-up challenges on our new Trent 7000 engine. As we move into 2019 we are confident that Trent 7000 production and delivery volumes will increase significantly to meet our customer commitments”.

Also within today’s release, Rolls Royce gave further guidance on their restructuring stating “The focus in 2018 has been on establishing our new operating model and on delivering the targets previously communicated; specifically, a 4,600 headcount reduction over the next two years, with around a third of these taking place before the end of this year. We are confident that the end result will be a simpler, leaner and more agile organisation that drives culture change through pace, simplicity, efficiency and empowerment”.  RR also updated their contingency plans regarding Brexit stating that they are negotiating with suppliers and looked into logistics in various outcomes.

In terms of stock value, 2018 has been a yo-yo of a year for Rolls Royce. Despite the 1,104 highs of August, current valuation has them down at 818.60, just over 3% down on the year. December started with a sharp drop in share value hitting a low of 758.60 not seen since early 2017 before rebounding.

Brokers have weighed in on their opinion of Rolls Royce in recent week with Goldman Sachs and Citigroup both placing a Buy recommendation on the stock and their target prices of 1,259.00 and 980.00 respectively, suggest that RR.L could be undervalued despite today’s gains of nearly 5%.

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