Fitch: Rolls Royce Earnings and Guidance Still Reflect Negative Outlook
OREANDA-NEWS. Fitch Ratings says that Rolls-Royce Holdings plc's (A/Negative) 2015 results and 2016 outlook statement were broadly in line with the agency's expectations and have no immediate effect on the rating. However, the results highlight the continued weak financial profile into 2016, which underpins the Negative Outlook on the Long-term Issuer Default Rating.
In 2016, the company is again expected to generate negative free cash flow as a consequence of the already heralded lower profitability stemming from deterioration in the maintenance and spare parts markets relating to the existing fleet of large aerospace engines, weak demand for corporate and business jet engines as well as continuous weakness in the marine division.
Fitch believes that some measures announced by the company will support its credit profile. Cash outflows will be limited thanks to a 50% reduction of the dividend payment in 2016, an increased focus on working capital management, especially with regard to inventory turnover, and ongoing efforts to improve the cost structure flexibility through a restructuring plan aimed to bring the core earnings of the company closer to levels displayed by industry peers.
Fitch also believes that the greater level of detail provided by the group in relation to its divisional reporting and cash flow guidance is credit positive. The increased transparency not only provides better insight into the operations of the company, but also allows for improved financial predictability.
The Negative Outlook reflects Fitch's belief that certain metrics such as gross leverage and the free cash flow (FCF) margin, which at end-2015 were at 2.6x and -2%, respectively, may stay at levels which are not in line with the rating over the medium to long term.
While these ratios are likely to again be outside the parameters of the rating at end-2016, they could recover in the medium to long term due to restructuring measures improving the group's cost structure as well as stabilisation in some key end-markets. However, should the recovery stall or take longer than expected, a downgrade is likely.
The present guidelines, which may, individually or collectively, lead to negative rating action include:
- Lease-adjusted debt/FFO ratio of sustained higher than 2x (2015: 2.6x, 2016E: 2.7x).
- FFO/revenue ratio of less than 11% over a sustained period (2015:11.5%, 2016E: 10%).
- FCF margin consistently under 3% (2015: -2%, 2016E: -2%).
- Fixed charge cover of under 7x (2015: 7.6x, 2016E: 6x).