Bernstein highlights rocky path to Rolls-Royce's turnaround

Bernstein downgraded Rolls-Royce to ‘underperform’ from ‘market perform’ and cut its price target to 515p from 602p.

The bank noted that since early last year, it has had a negative view on the fundamentals of Rolls-Royce's businesses, particularly the ability of the civil aerospace segment to improve margins and cash flow over the next few years.

However, the rating upgrade is driven by the change in CEO and its view that the balance of risks to the upside and downside were neutral until Warren East outlined his plans for the company after the first six months.

Bernstein said last week's strategy review update did not indicate a fundamental shift in the prospects of the company.

“Though Rolls-Royce has attractive market share on new widebody programmes going forward, we think an extended period of launching and ramping up new engine production will have a prolonged adverse effect on their ability to generate profit and positive cash flow from Civil Aerospace,” it said.

This, coupled with execution risk in implementing a deeper restructuring in the business, means there is potential for additional downside risks to financial performance.

At 1340 GMT, Rolls-Royce shares were down 3.9% to 587p.