Rolls-Royce Upgraded by Analysts

Morningstar equity analysts have upgraded Rolls-Royce's fair value estimate as restructuring will lower its costs by £400 million a year by the end of 2020

Jeffrey Vonk 15 June, 2018 | 4:04PM
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Rolls-Royce engines

Morningstar equity analysts are upgrading the fair value estimate for Rolls-Royce (RR.) shares to £11.40 after it announced a significant restructuring which will save around £400 million a year, with the loss of thousands of UK jobs. The company's shares rose nearly 10% today to 950p, and the company has a four-star rating from Morningstar, which means that its shares are currently undervalued.

Close to 60% of the fair value estimate increase relates to the benefits of the recently announced restructuring, while 50% of the increase results from a more positive stance on the power systems division's profits in 2018-20.

We still believe that Rolls-Royce is one of the most attractive investment opportunities we cover, and our stance is based on bullish expectations for the firm’s civil aerospace profits, resulting from dominant positions on, in particular, Airbus' fast-growing wide-body aircraft platforms.

By laying off close to 4,500 employees, mainly management and support functions in the UK, Rolls-Royce expects to lower its cost base by £400 million a year by the end of 2020. The cost per redundancy is on average £111,000 per employee, with total costs of £500 million.

The announced reduction of the workforce is in line with our expectations of a continued focus on fixed costs for Rolls-Royce's management. With six new civil aerospace engines introduced over the past decade, we have seen strong rising capital investment, research and development expenditure, and new product introduction costs. We expect to see fewer new models introduced in the next decade, and Rolls-Royce is heading towards being a more serviceoriented company, as the current young large installed base of wide-body engines is maturing.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rolls-Royce Holdings PLC457.80 GBX-2.14Rating

About Author

Jeffrey Vonk  is an equity analyst with Morningstar.

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