Rolls-Royce PLC (LON:RR.) faces a long haul to recovery, according to analysts looking at today’s trading statement from the aeroengine manufacturer.
Cash being generated has long been an issue for the FTSE 100 group and any comfort in today’s numbers was modest.
The company said it expects a colossal £4bn to flow out for the full year, albeit £3bn will be in the first half to June.
UBS said the most important catalyst for investors now remains long-haul flying hours and the scale of any gradual pick-up in late summer/early autumn.
Rolls-Royce said it expects flying hours to be down 55% for 2020 overall.
The Swiss broker said that investment valuations based on cashflow even as far out as 2022 were not attractive given the current uncertainty on long-haul traffic numbers and yields.
Airbus, with its greater exposure to a recovery in short and medium-haul demand, is a better bet added the broker.
Russ Mould at AJ Bell said that coronavirus had undone any progress the engineer had been making on its cashflow.
“Severe damage was inevitable given how reliant the company is on spares and repairs income from the aircraft engines it manufactures, with this business in turn linked to flying hours that have dropped dramatically thanks to restrictions on civil aviation.
“The numbers are stark and will do little to stem recent speculation that the company might need to issue shares or even offload a part of the group to generate cash.”
Sophie Lund-Yates at Hargreaves Lansdown, said Rolls-Royce’s business model relies heavily on the number of hours its engines spend in the air and that is a tough deal in the face of international travel disruption.
By 2021 engine flying hours are only expected to be at 70% of pre-pandemic levels.
Nothing could realistically stem the cash outflow in the first half of the year though, Lund-Yates added, with £3bn slipping away.
Reduced flying activity was a big factor here, she said, but the issue is compounded by Rolls’ largely fixed cost base.
“Its liquidity position [£8.1bn] means there are no immediate concerns, but we can’t rule out the possibility of extra funds needing to be raised while Rolls Royce waits for a return to normal.
“Neither a share issue nor disposal would be the ideal outcome for shareholders in the short-term, but could be necessary to protect the longevity of the business.”
Shares fell 8% to 265p, valuing the FTSE100 group at around £5.1bn.