Morgan Stanley lowers Rolls Royce target but sees 'compelling' value

Analysts at Morgan Stanley marked down their target price on shares of UK aerospace manufacturer Rolls Royce, but told clients to look past the temporary costs related to the Trent 1000 programme and that their fundamental value was "compelling", even if sentiment was at a low ebb.

Since June, the manufacturer had apparently downgraded its guidance for the company's underlying free cash flow, stoking concerns around the company's underlying performance.

Morgan Stanley believed those downgrades were related to the Trent 1000 engines and now expected the higher costs incurred to be sustained for longer.

Nonetheless, they explained that: "if management can ringfence these additional challenges in the next 12-24 months,and address investor concerns on mid-term targets, we think FY19 results on 28th February could be a watershed for the shares."

Their forecast was for all mechanical issues around the Trent 1000 mechanical issues to be adressed by 2021.

They also pointed out how the shares had barely flinched after Boeing reduced its monthly production forecast for the Dreamliner, which for them "tells us the market is already pricing in a bearish view on widebody".

On the back of their lower forecasts for for free cash flow in 2020 and 2021, which they cut by 15.0-20.0% to reflect the higher Trent 1000 costs, they revised their target price for the stock from 1,100p to 950.0pm but stayed at 'overweight'.