Rolls-Royce on Track to Meet Full-Year Targets

Narrow-moat Rolls-Royce’s cost-cutting program is paying off, and the group is on track to achieve its previous guidance of reducing free cash outflow to GBP 2 billion in 2021 from GBP 4.3 billion in the previous year and turning cash flow positive in the second half. Management has pushed out the previous GBP 750 million free cash flow target for 2022, as the recovery in flying hours is taking longer than expected. Engine flying hours for the first half of 2021 were at 43% of 2019 levels and should increase in line with the recovery in global air traffic into the second half of the year. The key driver for a return to positive cash flow is the recovery in wide-body flying hours and the successful execution of the remainder of the group’s GBP 1.3 billion civil aerospace cost-restructuring program. The shares are trading in line with our fair value estimate of GBX 110/$1.53. The uncertainty remains very high due to the wide range of outcomes for the cyclical and structural recovery, and we continue to prefer wide-moat peer Safran, which offers a more attractive risk/return profile.