Analysts Look to Trim Rolls-Royce Valuation

Another instalment in the firm's string of profit warnings has caused Morningstar analysts to review their fair value estimate

Jeffrey Vonk 6 July, 2015 | 2:49PM
Facebook Twitter LinkedIn

Rolls-Royce's (RR.) string of profit warnings has continued today, with the new CEO Warren East lowering the firm's full-year guidance amid weakness in its Civil Aerospace business and its Marine division.

We're adjusting our model for the latest revision, which will likely result in a modest decrease to our 953p-per-share fair value estimate. We're maintaining our narrow economic moat on the company.

Rolls-Royce's main drag in the first half was its Marine division, which saw sizeable profit deterioration due to continuing weakness in demand from its offshore client base. We expect this weakness to persist as market conditions remain challenging, and the company is expecting to commence a restructuring programme in this unit, potentially including asset impairments.

In its Civil Aerospace business, the firm saw weak demand and pricing for its Trent 700 engines. While Rolls-Royce is transitioning to the new Trent 7000 engine, it is still depending on Trent 700 to support this segment. Given current trends, the firm now expects a £300 million headwind in 2016.

Surprisingly enough, the company maintained its full-year top line guidance for 2015, only lowering its profit forecast. The downward revision in profit, while not substantial in magnitude, was sufficient enough to force the firm to suspend its share buyback programme. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Rolls-Royce Holdings PLC540.80 GBX2.77Rating

About Author

Jeffrey Vonk  is an equity analyst with Morningstar.

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures