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Rolls Royce shares jumped as much as 14.4% this morning to fresh 3yr highs (biggest jump since Feb 2016) thanks to a strategy update including tweaked financial guidance versus yesterday.
Today’s announcement builds on yesterday’s already impressive 6.5% climb on a trio of good news. Firstly, we were told that necessary restructuring/job cuts (to make it lean and mean) might cost £500m but would save a net £400m from 2020. Secondly, rising costs related to Trent 1000 engine problems would not affect the company’s £450m (+/- £100m) 2018 free cash flow guidance (ROIC up to 15% from 9%). Lastly, the 2020 target of around £1bn cash flow still stood. All good noise to help the shares reverse strongly from lows of 820p and break above May highs.
What’s new this morning? The company now says that it is well placed to “exceed” that £1bn free cash flow by 2020. Nice. The mid-term ambition (no deadline) is also for free cash flow to exceed £1 per share (from 15p in 2017). With 1.86bn shares outstanding this implies a big target (£1.86bn+?), understandably helping the shares build on yesterday’s revival of investor interest, trading 1000p to test last summer’s 990p peak. With 4yr falling highs resistance at 966p having already been successfully tested for support, Bulls are now eyeing Jan 2014’s peak of 1294p (29% north).
After all the positive noise from CEO East, now it’s time to deliver, to keep the shares bearing North.
Mike van Dulken, Head of Research, 15 Jun 2018
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