Goldman Sachs downgrades Rolls-Royce on valuation

Shares in aerospace and defence group Rolls-Royce were in the red after Goldman Sachs downgraded the stock to ‘neutral’, removing it from the bank’s Pan European buy list.

It noted that since being added to the list on 29 September 2015, the stock is up 10% versus the FTSE World Europe up 4.5%, despite consensus 2016 EBIT forecasts dropping 35%.

Goldman said Rolls significantly underperformed in the fourth quarter on the back of the November profit warning, but year-to-date the shares are up 23%, versus the FTSE World Europe down 2.3%.

“We continue to expect cash conversion to improve from 2017; however, given the share price performance so far through 2016, we think this, along with the prospect for EBIT improvement (from 2017E onwards), is now reflected in the share price.”

The bank’s 2016-18 EBIT forecasts drop 5%, 3% and 4%, respectively, driven by more significant headwinds in the Large Engine aftermarket and higher costs in the Marine division.

Goldman nudged its 12-month price target up to 725p from 711p.

At 1050 GMT, Rolls-Royce shares were down 2% to 686p.