Rolls-Royce powered by optimism on cash generation
SHARES in engineer Rolls
Royce rallied after Morgan Stanley hiked its rating to “equal weight” due to increased confidence on cash generation.
After better-thanexpected half-year results, boosted by XMB engines sold as spares at a cash profit, the investment bank sees “an improved outlook for free cash”. As such, analysts said they are “no longer as concerned”. Two months ago, Morgan Stanley warned that the FTSE 100 company might be at risk of a further credit rating downgrade by rating agency S&P.
After spending “a reasonable” amount of time with the company following its half-year results, Jamie Rowbotham, of Morgan Stanley, said: “It is clear management has a better handle on the levers that can be pulled for cash to improve going forward.” However, analysts noted that the engineer will need to deliver “a far stronger” set of results for the second half of the year, compared with the first, to meet market expectations for the year.
In autumn, Rolls will provide an update on its transformation programme and its outlook for 2017 and 2018. Morgan Stanley reckons it has the building blocks to “at least serve to underpin consensus”, if not to upgrade it. It also sees scope for additional cost savings. The rating upgrade lifted shares 33½p, or 4.4pc, higher to 797p.
On the broader market, London’s FTSE 100 bucked the wider downward trend in Europe, enjoying its fifth day of consecutive gains. It rose 15.12 points, or 0.22pc, to 6,866.42.
Insurer Prudential was also among the stand-out performers following betterthan-expected results. The FTSE 100 company posted half-year operating profit of £2.06bn, well ahead of consensus forecasts of £1.88bn, thanks to growth in Asia. Shares climbed 31p, or, 2.2pc, to £14.23.
Its peer RSA Insurance enjoyed a rating upgrade, causing shares to rise 2½p to 509½p. Panmure Gordon hiked its rating to “buy” after its better-than-anticipated half-year results last week. Elsewhere, Smiths
Group continued to benefit from Tuesday’s trading update, when the engineer said its full-year revenue and profits were likely come in ahead of expectations. In its wake, brokers RBC and Stifel raised their price targets, sending shares 19p higher to £13.41.
Gold inched up as much as 1.3pc to $1,357 a troy ounce as the dollar weakened on muted prospects of a Fed rate hike. The weakening dollar makes gold less expensive for other currency holders. In its wake, shares in Randgold Resources rose 100p to £85.95 and Fresnillo advanced 3p to £19.60.
Separately, Panmure Gordon raised its target price on Randgold Resources from £67.50 to £68.92. However, after outperforming the mining index by 95pc last year, Kieron Hodgson, of Panmure, cautioned: “We believe the current market premium has become stretched and is no longer justified.”
On the mid-cap index, Peppa Pig owner Entertainment One leapt 22½p, or 10.3pc, to 240p, after it rejected a bid from ITV. Despite rumours of
ITV’s interest surfacing in April, the broadcaster only confirmed the proposed combination yesterday. Shares in ITV edged up 1.8p to 200½p. Neil Campling, of Northern Trust Capital Markets, said it was surprising the offer was for the entire company. “The TV assets could be of interest for ITV to expand the content into children’s content and access TV production assets but Entertainment One is primarily a film distribution business with weak free cash flow generation,” Mr Campling added. Elsewhere, security firm
G4S enjoyed its best day in 15 years, rallying 31.6p, or 16.2pc, to 227.2p, in relief after better-than-expected half-year results. Despite expectations that it might slash its dividend, the midcap company maintained it at 3.59p per share.
Robust half-year results lifted shares in mobile payments group Paysafe 24.1p, or 6.2pc, to 415.2p. The FTSE 250 company enjoyed revenue growth of 118pc in the first six months of the year, thanks to strong dollar value growth in its payment processing and digital wallets businesses.
Meanwhile, B&M European Value Retail bounced 9.7p to 273.6p after Morgan Stanley lifted its rating to “overweight”. Morgan Stanley’7s Geoff Ruddell said: “With an increasingly credible international growth story, we think the shares are now looking very attractive.” Finally, Regus plunged 20.9p, or 6.5pc, to 300.1p, when it suffered a rating downgrade. Numis cut its rating to “hold” from “buy” citing a softening outlook. Although the focus on cost control, returns and greater capital discipline are encouraging, Steve Woolf, of Numis, said: “We believe shares are up with events in the short term.”