Rolls-Royce slips amid Investec’s ‘material headwind’

Rolls-Royce lagged behind a London market rally on Monday that lifted the FTSE 100 to a fresh record high.

Rolls was under pressure after Investec questioned whether management can hit a target of delivering more than £1bn in free cash flow by 2020. The cost of developing a new engine for Boeing could be “a material headwind” to that goal, the broker warned.

Boeing is reportedly finalising the design of a short-haul jet, dubbed the 797, which analysts expect to go into service by the middle of next decade.

If Rolls is selected as Boeing’s engine supplier the development costs are likely to exceed $10bn, with a return on the investment only evident by the 2030s at the earliest, forecast Investec.

If Rolls is rejected, it will lose share at the higher end of the market as Boeing’s new jet is likely to cannibalise demand for the Rolls-powered Airbus A330neo, it said.

Rolls closed 1.1 per cent lower at 854p. The stock had jumped since the start of May on the back of a reassuring shareholder meeting and investor roadshow, along with short covering.

Miners led the wider market higher as a weak dollar lifted metals prices, lifting the FTSE 100 to a record closing high for the second consecutive day.

The FTSE rose 0.3 per cent, adding 18.98 points to 7,454.37, as Anglo American gained 3.2 per cent to £10.75 and BHP Billiton took on 2.3 per cent to £11.91.

Citigroup ran the numbers on a BHP break-up, arriving at a sum-of-the parts valuation of £15.40 per share.

However, BHP has consistently traded below its break-up value, suggesting the market “has been efficient in pricing in value destruction”, so a spin-off risks only delivering a one-off realisation of value, said Citi.

“We think there is a pathway for the company as it needs to optimise its portfolio, shrink assets run with lower debt levels and actively manage volatility to lower its cost of capital, which ultimately could drive a bigger re-rating than simply spinning petroleum or selling US onshore,” the broker said.

Holiday companies were under pressure after Tui, down 4.8 per cent to £11.33, reported a deterioration in UK bookings. Thomas Cook, which posts interim results on Wednesday, faded 3.7 per cent to 92.4p.

Ahead of results on Wednesday, Sophos climbed 7.3 per cent to a record high of 366p as security software stocks benefited from press coverage around the WannaCry ransomware attacks.

Relx was off 0.8 per cent to £16.12 after UBS downgraded the publisher to “neutral”, largely on valuation grounds.

Consort Medical edged 0.5 per cent higher at £10.31 after Patheon, a US drug development peer, agreed to be bought by Thermo Fisher for a $7.2bn enterprise value.