Analyst Note
| Joachim Kotze |There were no surprises or changes to the near-term outlook as narrow-moat Rolls-Royce performed in line with expectations in today’s trading update for the first four months of 2021. Engine flying hours for the first four months were at 40% of 2019 levels, and will remain at a similar rate to the end of 2021. The group still expects to turn cash flow-positive in second-half 2021, while no specific mention was made regarding the previous guidance of GBP 2 billion of free cash outflow for 2021 and the GBP 750 million positive free cash flow target for 2022. We read this as no news is good news. The key driver to a return to profitability and a cash flow-positive position is the recovery in widebody flying hours and the successful execution of the group’s GBP 1.3 billion civil aerospace cost restructuring program, which according to today’s update is progressing according to plan. Shares are trading in line with our fair value estimate of GBX 110 (ADR: USD 1.53). The uncertainty remains very high due to the wide range of outcomes for the cyclical and structural recovery, and we continue to prefer wide-moat peer Safran which offers a more attractive risk/return profile.