Rolls-Royce Holdings PLC's (LSE:RR.) new chief executive Tufan Erginbilgic is unlikely to be able to change the company from being a value destroyer and there is a risk he could alienate its biggest customer, JPMorgan has warned.
In a note looking at the wider airline engine sector – "a great industry; but not all companies are equal" – the investment bank looked at the strengths and weaknesses of each company.
The global aero engine industry generated sales of roughly US$70bn last year, it noted, mostly concentrated across five companies: GE; Pratt & Whitney (owned by Raytheon); Rolls-Royce; Safran; and MTU Aero Engines.
Recently Erginbilgic called the company a “burning platform” and told his employees that “every investment we make, we destroy value”.
The JPMorgan analysts said: “We are not convinced Mr Erginbilgic can change this.”
As part of their new analysis, the analysts argue that RR “massively under prices” its long-term service agreements, which they suppose is designed to win market share and generate cash flow.
“We believe Mr Erginbilgic will try to raise pricing; in doing this he could risk losing market share and alienating Airbus (its key customer).”
Other concerns on the FTSE 100-listed company raised by the analysts include the poor performance of two of its new-generation engines, the Trent 1000 and Trent 7000.
Also highlighted for worries are the £7.4bn liability on its balance sheet for future maintenance work still to be done, Rolls' “very weak” balance sheet (though recent results showed debt was cut from £5.2bn to £3.3bn) as well as the high turnover in its top leadership in the last five months, which includes a new CFO.