“Our key conclusion is that at every level (clean EBITA, clean FCF ex TCC, and the balance sheet) the FY18 results are much worse than expected after stripping out the multiple exceptionals and accounting benefits,” wrote JP Morgan, in bold face, shortly after the earnings announcement.
“Worth flagging [is] that RR now has negative equity of c£1bn, vs JPM estimate of ‘adjusted net debt” of £11bn,’” the investment bank wrote. This is the first time the company has a negative net worth.
JP Morgan adds, “RR’s core Civil Aero division is currently loss-making, even using the RR defined EBITA. Even by 2023/24 we doubt the division can exceed a 10% EBITA margin, meaning it will be significantly less profitable that its European peers.”
In a note issued the next day, JP Morgan went further. The analyst, David Perry in London, ticked off nine accounting concerns that gave short-term or one-time boosts to last year’s financial results, strategic concerns and execution issues.
Free Cash Flow is weak, multiple analysts say. A measure of the financial strength of the company (one the one largely driving Boeing’s financial strength and stock price), RR’s FCF falls well short.
FCF has been a concern for months.
“Without a significant pick-up in large engine orders over the coming years, we believe Rolls will struggle to deliver on its medium-term FCF and ROIC ambitions. We estimate that Rolls needs to book at least 500 net engine orders a year, if not more. The improvement in FCF is also contingent on the successful transition of a growing number of maturing engines to new service agreements,” wrote Rami Myerson of Investec in a note last September.
He wrote that Rolls needs to book sales of 500 engines per year to meet the then-listed FCF targets.
“Order intake has been noticeably weak in recent years and needs to increase significantly to support the big improvement in FCF which Rolls aspires to in the medium term. If not, Rolls will likely reduce OEM engine production rates, slowing the reduction in new engine losses and growth in engine flight hours,” he wrote.
“My take is they are starting to run out of money and the financial situation is difficult,” one London analyst told LNA in an interview. He remained anonymous to speak candidly. “I think Boeing realized it before RR and told them the balance sheet can’t support this new program.
“They don’t have a balance sheet to take this kind of risk. They aren’t making any money.”
Another UK-based industry official had a similar view, if a somewhat different take.
“My guess: Boeing told them their engine is too risky/not proven and gave RR the chance to withdraw before losing,” this person wrote LNA.
Both persons acknowledged their views are speculative, however.