Power cut
The last 18 months have proved to be particularly torrid for Rolls-Royce (L:RR), and it now needs to rebase and reset. New management appears keen to provide a more cohesive approach to the market, possibly with increased disclosure levels, but clearly with simpler messages and potentially more measurable milestones. The exact form of this should become more apparent at the investor day on 24 November. While the further reduction to FY16 guidance hurts sentiment, we believe the long-term cash generation of the civil model should remain the core investment factor. RR needs to build a conviction that it can convert its order backlog into real cash over time.
Additional profit headwinds for FY16
The Q3 statement has confirmed guidance for FY15, albeit for profits at the bottom end of the range. More importantly, adverse markets have thrown up £300-350m of additional headwinds, which will be accompanied by an incremental cost base reduction programme yet to be detailed. These are in addition to the £300m FY16 headwinds announced in July. Some of the factors persist beyond next year and estimates continue to fall. We reinstate forecasts based on this latest guidance.
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