Credit Suisse compliments Rolls Royce on cash generation

Credit Suisse had some positive things to say about Rolls Royce on Wednesday after the British jet turbine manufacturer showed strong underlying cash generation at its earnings presentation.

After Rolls-Royce delivered a better than expected free cash-flow in 2017, despite absorbing £170m of outflow related to in-service issues with the Trent 1000/Trent 900 engines, analysts at Credit Suisse said the firm was continuing to "improve the transparency about its earnings and cash", with the group not expecting any further issues with the Trent XWB, with good in-service performance and a stronger design process.

However, given the scale of the XWB programme, any material issue would likely have "an oversized impact".

On the downside, Credit Suisse did find Rolls' dividend of 11.7p for 2017 "slightly disappointing", noting that as the group was making a "big strategic push" in electrification and digitalisation, it could lead to some of the cash generated being allocated to mergers and acquisitions rather than shareholder return.

Credit Suisse stood behind its earlier target price of 720p and 'underperform' rating on Rolls Royce.

"The jump in the stock price appears logical if one assumes that the underlying cash generation is £100-150m better than expected structurally (i.e. excluding the “exceptional” in-service issues) and that the market is willing to pay a 6.5% FCF yield for the stock on 2020E," the analysts concluded.

As of 1650 GMT, shares had grown 11.46% to 924p.