Rolls-Royce share price in focus as Morgan Stanley points to valuation concerns

on Jun 14, 2016
Updated: Mar 11, 2020

Analysts at Morgan Stanley remain bearish on Rolls-Royce Holdings (LON:RR), pointing to the stock’s ‘rich valuation’. The comments mark the latest setback for the blue-chip engine maker which has been trying to recover from a string of profit warnings.

Rolls-Royce’s share price fell 0.50 percent to close at 600.50p yesterday, outperforming the benchmark FTSE 100 index which shed 70.79 points to close 1.16 percent lower at 6,044.97. The group’s shares have lost nearly 40 percent of their value over the past year, but are up some four percent in the year-to-date.
Morgan Stanley reaffirmed its ‘underweight’ stance on Rolls-Royce yesterday, with a price target of 655p on the shares, arguing that while the company is likely to beat market forecasts for profits this year, there was a lack of obvious catalysts for the share price. The analysts further noted that Standard & Poor’s might see a need to downgrade the engine maker if debt to EBITDA was above 1.5 or if free funds from operations (FFO) to adjusted debt fell below 60 percent in a sustained manner.

“With Rolls unlikely to be able to do much in the coming months to allay market concerns around 2016 profitability, cash generation and even the credit rating, we see a risk of a continued de-rating,” Morgan Stanley analysts Jaime B Rowbotham and Joseph Ayoola were quoted as saying yesterday.
Their comments came after Rolls-Royce’s chief executive Warren East recently warned staff that the engine maker was running behind with deliveries to customers, and urged employees to redouble their efforts to ensure that challenging profit targets for this year were hit.
JPMorgan Chase & Co reiterated their ‘neutral’ rating on Rolls-Royce last week, without specifying a price target. Barclays meanwhile remains ‘underweight’ on the FTSE 100 engine maker, valuing the shares at 400p.
As of 08:08 BST, Tuesday, 14 June, Rolls-Royce Holding PLC share price is 600.50p.


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