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Rolls-Royce downgraded as UBS sees aftermarket as 'most impacted' by coronavirus

Forecasts for component makers Melrose Industries and Meggitt were also cut, thought the former remains a 'buy'

Rolls-Royce Holdings PLC -

In light of the sharp decline in global air traffic in 2020 because of coronavirus and a slow recovery for long-haul travel, Rolls-Royce Holding PLC (LON:RR.) has been downgraded by UBS, with forecasts for other aerospace component suppliers cut too. 

Analysts at the Swiss bank forecast a 35% decline in air traffic for 2020, slightly below the 38% predicted by the airline industry body, and believe the civil aftermarket “will be one of the most impacted end-markets” in the short term.

What’s more, engine maker Rolls-Royce gets around 54% of its sales from long-haul travel aftermarket, which the UBS analysts said they envisage a slower recovery ahead. 

Underlying profit (EBITA) forecasts for Rolls-Royce were cut 44% for 2020 and 28% for 2021, the recommendation downgraded to ‘neutral’ from ‘buy’ and the price target slashed to 328p from 664p.

Rolls-Royce shares fell 4% to 288p on Thursday morning, down 57% this year.

Forecasts for component makers were also cut. 

Melrose Industries PLC (LON:MRO) by 25% for this and next year but it was kept as a ‘buy’, though with the price target cut to 128p from 235p.

Meggitt PLC (LON:MGGT) forecasts were trimmed 9% and 7% but it remained a ‘sell’, with the target cut to 241p from 379p.

Melrose shares were up 5% to 78.66p, still down 67% in the year to date, while Meggit was down 3.5% to 237p, down 64% in 2020.

Airbus can weather coronavirus

Looking at the aeroplane makers, UBS reckons Airbus “could weather the storm relatively better than the peer group” and was kept as a ‘buy’ with a lower price target of €100 as delivery forecasts are slashed 21% over the coming four years.

Analysts think demand “will remain driven by airlines' willingness to reduce fuel costs and carbon emissions mid-term, but a lower oil price short term reduces the appetite”. 

“Airbus is better positioned with the A321neo and A220. It can weather a €10bn FCF  outflow in 2020 as long as government bailouts, equity raising & government agencies' financing enable the airlines to cope with short-term impact, and look beyond COVID.” 

Overall the analysts think that total aircraft demand will be reduced by continued focus on carbon emissions and coronavirus.

Airbus shares were up 4% in France, down 57% in the year to date.

Quick facts: Rolls-Royce Holdings PLC

Price: 355.9 GBX

LSE:RR.
Market: LSE
Market Cap: £6.87 billion
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