Rolls-Royce slides as Exane highlights short-term risks

Shares in engineering giant Rolls-Royce slid after Exane BNP Paribas slashed its price target on the stock to 685p from 840p to reflect an additional pullback in the civil aerospace margin and further pressure on shorter-cycle activities.

Exane said Rolls, which it rates at ‘neutral’, has been the worst performer in the sector over 12 months, but the arrivals of Warren East as CEO and an activist fund on the the share register have revived hopes of turnaround.

The bank said communication and transparency have started to improve, attracting interest from value investors tempted to capture the potential of a large, young installed base that should turn cash generative over time.

However, Exane sees short-term downside risk to cyclical activities which account for up to 46% of sales, on which the company is likely to comment in its interim management statement on 12 November.

In addition, it said research and development and defence could increasingly become headwinds to the group’s earnings.

Exane said key risks include the impact of the drop in capex of oil & gas companies, working capital and pricing impacts on cash flow in the ramp-up phase of the new Trent programmes.

At 1027 GMT, Rolls-Royce shares were down 2.9% at 678.50p.