JP Morgan bullish on aerospace but not on Rolls-Royce

Analysts at JP Morgan sounded a bullish note on the outlook for the European civilian aerospace and defence sectors, but with the notable exception of Rolls Royce.

They forecast "solid" multi-year growth as civilian air traffic continued its recovery from Covid-19 while Defence was heading into a 5-10 year cycle of higher spending.

Rolls Royce's earnings before interest, taxes and amortisation on the other hand were "too low".

Indeed, the only way it could generate free cash flow was by collecting customer advances on long-term contracts, JP Morgan noted.

Furthermore, adjusted net debt, on JP Morgan's definition, which included customer advances, pension liabilities, money owed to joint-ventures and cash provisions, of about £15bn, meant the balance sheet was "very weak".

The broker also highlighted how the recovery in wide body engine flying hours predicted by the engineer in late 2020 had failed to materialise.

Hence, JP Morgan stuck to its 'underweight' recommendation and 70.0p target price for the company's shares.