Analyst Note| Joachim Kotze |
Narrow-moat Rolls-Royce delivered another disappointing update; the group expects free cash outflow of GBP 2 billion in 2021, on the back of a delayed recovery due to enhanced travel restrictions, and compares with our forecast of an outflow of GBP 600 million and consensus, as published on the group’s website, of negative GBP 864 million. The group’s prospects are heavily geared toward a recovery in long-haul flight hours, which drives high-margin civil aerospace aftermarket revenue for the group’s fleet of wide-body engines. Management expects flight hours for 2021 to reach 55% of 2019 levels, lower than the previous base case of 70% communicated in October 2020. The company is making good progress with its cost restructuring program and remains confident it can achieve free cash flow of GBP 750 million by 2022. We remain more skeptical on the recovery and forecast free cash flow to only reach the targeted level by 2023. We will make slight changes to our near-term forecasts, but don’t expect any material change to our GBX 95 (ADR: $ 1.20) fair value estimate. Despite the stock trading down 10% intraday, we believe the limited upside does not offer a sufficient margin of safety given the high level of uncertainty attached to the stock. We continue to favor Safran, which offers an attractive risk/reward ratio to long-term investors.