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Morningstar | Rolls-Royce Reaffirms Guidance; Restructuring Progressing, Including Recent U.K. Job Cuts

In its recent trading update, Rolls-Royce guided towards the upper half of its range for fiscal 2018 EBIT and free cash flow. Since the update, the company has signed a $300 million deal with Lebanon's Middle East Airlines for engines and service on Trent 7000 engines, which will go into four Airbus wide-body A330-900neos for the airline. (Rolls-Royce is the only engine supplier for the A330neos.) The shares are down more than 20% from their 2018 peak in August over market concerns regarding service issues on the Trent 1000 engines and deliveries of the Trent 7000, as well as recently being dragged down with the FTSE 100 while investors price in uncertainty risks from the as-yet-undecided Brexit terms. Our narrow moat rating and fair value estimates of GBX 1,140 and $15 are unchanged.

Rolls-Royce, like other companies, has been stockpiling inventories in the event of a hard Brexit. As a backup, the company is also transferring design approvals for large aero engines to Germany, working with the European Aviation Safety Agency, similar to the process it carried out for business jets. The transfer is not necessarily permanent and is reversible.

In its trading update, management said it is making progress on its restructuring, which was announced in July and included, among other measures, a 14% head count reduction with cuts primarily in nonmanufacturing roles. We note the company has been downsizing in the United Kingdom with around 220 job cuts announced from sites in Bankfield, Ghyll Brow, and more recently Barnoldswick.

Please see our recent report "Brexit: Worst-Case Scenario Implications for Our Coverage" for an overview of the effects on Morningstar's coverage in the case of a disorderly hard Brexit.