Proactive Investors - Rolls-Royce Holdings PLC (LON:RR.)’s strong surprise pre-interim results update on Wednesday may not be as rose-tinted as seems, analysts have said.
Acknowledging that raised profit and cash flow guidance was “clearly a positive,” UBS analysts questioned the key reasons for the better expectations.
“We believe questions are likely to be raised on the underlying drivers of the outperformance,” the bank noted.
Civil aerospace will likely be the market’s key focus in Rolls’ upcoming full interim result statement, with no material beat on expected engine flying hours marking a concern.
Unchanged engine delivery and shop visit guidance as a result may also leave investors with questions, UBS said, though Shore Capital noted this could only mean an improvement in margins.
UBS argued that such drastic improvements were unlikely to be a direct result of new chief executive Tufan Erginbilgic’s transformation plan though, given he only joined the company in January.
“We believe most improvement programs, including pricing, would take more time to achieve such a large improvement.”
Despite the scrutiny, UBS joined the like of Shore Capital and Deutsche Bank (ETR:DBKGn) and in backing Rolls-Royce by reiterating the company’s place on their ‘buy’ lists.
Taking a positive stance, Deutsche Bank raised Rolls’ share price target by 50p to 210p – marking a prospective rise of 11% on Thursday’s opening.
“[We are] encouraged by underlying business and cost transformation improvements,” the German bank noted, also pointing to Rolls’ new profit and free cash flow guidance of £1.4bn and £1.0bn respectively.
Shore Capital focussed on Rolls’ long-term prospects meanwhile, suggesting the company was still recouping from recent years of underperformance, meaning future results would be more indicative of Erginbilgic’s impact.
Rolls-Royce will release full interim results on Thursday, 3 August.