By Alexander Bueso
Date: Friday 21 Jun 2019
LONDON (ShareCast) - (Sharecast News) - Analysts at JP Morgan reiterated their 'underweight' recommendation on shares of Rolls Royce, pointing to a weakening market for wide body jets and the European Union's drive to reduce the hit to the environment from aviation.
The latter, they said, left the engineer's guidance on research and development looking "unrealistic".
"We do not believe this is realistic given the rapidly changing views of regulators and the public regarding the environmental impact of aviation. Moreover, as the least profitable aero engine company, RR's profits face the greatest % hit from upward pressure on R&D," they said to clients in a research note.
Rolls Royce was guiding at the time towards a decline in R&D spend as a proportion of sales through to 2024.
"We return from the Paris Air Show (PAS) with significantly increased conviction in our UW rating on RR," JP Morgan said.
On its estimates, consensus forecasts for earnings per share in 2020 and 2021 looked about 20% too high.
It also cautioned that Airbus's upcoming launch of its A321 XLR would "cannibalise" the bottom end of the wide body market.
To take note of, in a separate research note, the investment bank cautioned of the multiple "bumps" that lay ahead for the European civil aerospace sector, including: "slower air traffic growth, weaker airline earnings, MAX timeline uncertainty, Trump tweets that the [US] $ is too strong, and potential US tariffs on Airbus."
However, "we see no reason to doubt that the civil aero up-cycle could continue for many more years," they added.
JP Morgan kept its target price for Rolls Royce at 650.0p, implying 30% downside for the company's shares.
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