Rolls Royce profits to get big lift from drop in sterling

Rolls Royce´s revenues were set to grow more slowly in the short-term but the drop in sterling´s value was set to give the manufacturer´s bottom-line a big boost over the short-to-medium term, analysts at Credit Suisse said.

Following an analysis of the trends in parking and retirement of aircraft powered by the company´s engines, the Swiss broker said revenues in 2016 and 2017 would increase by 100 and 200 basis points less than it had previously anticipated.

Among the trends mentioned in the report was the recent 42% jump in the number of parked aircraft that used the firm´s engines over the past 18 months, versus a flat parking rate for the overall fleet.

That trend would continue for the Trent 500 turbines (used in the A340) and the Trent 800 series (Boeing 777), although the Trent 700 would obtain some relief from the A330, the Swiss broker said.

Older platforms, such as the RB211s (747, 767) and Trent 500s (A340), were also set to be retired at a worse pace than its peers, analysts Olivier Brochet and Ashlee Ramanathan said in a research report sent to clients on 1 July. Brexit might add to this retirement risk, they added.

The business jet segment was also under pressure, adding to the problems in Rolls Royce´s civil aerospace division, they said.

Credit Suisse also adjusted its forecast for original equipment and aftermarket downwards.

For the first half of 2016, the analysts projected PBIT of £14m (versus £456m last year) together with a cash outflow of £1.04bn.

Nonetheless, the drop in sterling´s value versus the US dollar and the single currency (USD/GBP assumption moving from 1.45 to 1.35, and EUR/GBP from 1.30 to 1.20) saw their estimates for the company´s profits before interest and taxes boosted by 9%, 12%, 14% over 2016 to 2018.

Hence, their target price - based on a 2018 sum-of-the-parts valuation - on the shares was lifted from 543p to 590p.

Brochet and Ramanathan stuck to their 'underperform' recommendation.