Heavyweight broker Deutsche is downbeat on engineering stalwart Rolls Royce (LON:RR.), saying the effects of a change in its accounting regime are worse than expected.
It also believes efforts to improve the business are being overestimated by the share price and therefore the market.
Analyst Benjamin Fidler repeated a 'sell' and targets 474p for the shares (currently at 720p).
At a capital markets day yesterday, Rolls conceded that under new accounting rules from 2018 its profits would fall in the short term.
Under the new regime, Rolls’ 2015 profits would have been £900mln lower than the £1.4bn it reported.
Fidler noted the restatement would see civil aerospace margins fall to an estimated negative 9% in 2016 with civil aero likely remaining in loss until 2019.
Although free cash flow is unchanged, cash flow multiples remain unconvincing even by 2020 compared to sector peers.
The update on trading yesterday also failed to impress Deutsche, with underlying trading at civil aerospace falling short of expectations, only counterbalanced by foreign exchange.
For 2017 the outlook for the marine has also deteriorated, noted Fidler, which has been hit by the oil price slide.
"Although we recognise the steps management is taking to improve the business, we believe the pace with which these will be felt is being over-estimated within the current share price."