Rolls-Royce boosted by Morgan Stanley upgrade

In its note on the company back in June, MS had pointed out that there wasn’t much room to manoeuvre before Rolls might be at risk of a further credit rating downgrade by Standard & Poor’s.

However, the bank said that following better-than-expected first-half results, underpinned by XWB engines sold as spares at a cash profit, it sees an improved outlook for free cash and is no longer as concerned.

“Further, having spent a reasonable amount of time with the company post H1, it is clear management has a better handle on the levers that can be pulled for cash to improve going forward.”

Morgan Stanley said the trading cash outflow from Civil Aerospace in 2016 now seems unlikely to be as severe as it previously expected.

“The main change for us comes on the XWB programme where we hadn’t appreciated the proportion of engines that will be sold as spares at a cash profit in the early years of the ramp-up, thus part offsetting the impact from engines sold on wing at a cash loss.”

As a result, the bank now expects Civil trading cash outflow of £87m versus a previous estimate of £180m, followed by an £11m inflow in 2017, versus a previous estimate of a £20m outflow.

This has contributed to an improvement in group free cash flow to an outflow of only £112m in 2016 versus expectations of £250m previously, meaning MS is now at the upper end of the group’s guidance for an outflow of £100-300m, and to an inflow of £104m in 2017.

At 1035 BST, RR shares were up 3.5% to 790.50p.