Rolls Royce Cuts 2020 Cashflow Outlook; Shares Drop 7%

Rolls Royce lowered its 2020 cash outflow forecast and warned that the outlook remains challenging going forward, sending its shares down 7.4%.

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Rolls Royce (RR) now expects approximately £4.2 billion in free cash outflow for 2020, revised down from the £4 billion guidance provided in October. The company, which completed a £5 billion recapitalization package in November, expects 2020 net debt to be between £1.5 – £2 billion, excluding lease liabilities of about £2.1 billion.

Meanwhile, Rolls Royce confirmed that the company was making good progress on their restructuring plans to reduce £1.3 billion in costs, and to cut at least 9,000 jobs by 2022. More than 5,500 roles are expected to be reduced by year-end which is ahead of the company’s prior expectations of over 5,000, it said.

In December, Rolls Royce agreed to sell its civil nuclear and control business, which is expected to add to the company’s target of generating at least £2 billion from the sale of disposals.

Looking ahead, Rolls Royce believes that the fundamental drivers to long-term growth are still intact and targets at least £750 million FCF excluding disposals by 2022. (See RR stock analysis on TipRanks)

Morgan Stanley analyst Andrew Humphrey this week initiated a Hold rating on the stock with a price target of 132p (12% downside potential). The analyst cautioned that a slower recovery in commercial travel could cause some cashflow volatility.

Consensus among analysts is a Hold based on 2 Buy ratings, 3 Hold ratings and 3 Sell ratings. The average price target of 75.90p implies a potential decline of around 36% over the next 12 months.