JP Morgan cuts Rolls-Royce target price on three new concerns

There are three new reasons for investors to cut their holdings in Rolls-Royce, JP Morgan said as it reduced its price target on the engine maker.

The FTSE 100 company's first-half results were broadly as expected but the outlook statement was more cautious than before, JP Morgan analysts David Perry and Sean Stewart said. They cut their price target to 80p a share from 90p with an unchanged 'underweight' rating.

The analysts said Rolls-Royce's free cash flow was under renewed pressure, leading them to cut their estimate for 2021 free cash flow by €300m to €1bn.

In its results statement Rolls-Royce said that in a "severe but plausible downside scenario" its ability to continue as a going concern could be threatened, the analysts pointed out.

Insiders are also leaving the group. Chief Financial Officer Stephen Daismith announced he was joining Ocado on results day and activist investor ValueAct, which had a board seat, is reported to have sold all its stake.

Civil aero stocks can be lucrative investments after a major sell-off (e.g. 2003, 2009) so we consider Mr Daintith’s departure a bearish signal," the analysts wrote in a note to clients. "Similarly, in March 2019, when ValueAct began selling down its stake in RR, we cited this as a red flag."

Rolls-Royce shares fell 2.7% to 243.24p at 10:37 BST.