Equity Research; Rolls Royce

Rolls Royce FY2016


Rolls Royce has challenges keeping up in its core commercial aerospace market. Some of its product range is a bit dated, with newer products, the Trents 7000, 1000 and 900 and XWB engines all in the cash consuming stage in the engine life cycle. Rolls needs to do better in the high growth widebody aircraft relative to its major competitors (Pratt & Whitney/ Safran). Rolls is targeting 50%+ market share in installed widebody “over the next decade”. This is a good target but Rolls has catching up to do.

There are plenty of moving parts in Rolls, but the 2016 results are to some extent a “kitchen sink” exercise, with plenty of bad news in the knowledge that investors post the bribery scandal are expecting bad news. Still the group free cash flow generation of just £100m is very low (2015 £179m) with virtually all cash generated from operations (£1.41bn) spent in investments (£1.36bn). Underlying EPS fell 49% to 30.13p. This decline could take 2-3 years to recoup.

The board hedged with an outlook statement that affirmed a strong long term outlook but a flat short term outlook. There is no improvement in free cash generation (still £100m for FY17) which is low given £14bn annual revenues. The losses today are due to the realization that profit growth is post 2017.

Subscribe to our Award-winning Newsletter

We provide daily market data in the form of our award-winning newsletter, The Morning Call and The Market Close.
You can subscribe to this information at any time to help you make the most of your investment.

Quick Sign-up

Get Started with CSS

Open an Account

Subscribe to our award winning daily newsletter

Voted "Best Market Newsletter" in 2012, 2014, 2015 and 2017 by the City of London Wealth Management Awards

Subscribe to our newsletter (Popup)

By signing up to our free email, you are consenting to receive these promotions. The newsletter is sent up to three times per day during the week and up to once per day over the weekend and is directed at UK residents. The newsletter contains company news, market movements, CSS research and promotions and breaking economic news. Occasionally our newsletter will contain advertisements from trusted partners. However, we will never give, sell or rent your email address to any other companies. If you want to stop receiving our free emails you can unsubscribe at any time by clicking on the link at the bottom of each email. You can read our privacy policy here.

No, thank you I am already subscribed