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Rolls-Royce shares could sink to new lows despite recent rebound

Rolls-Royce shares could sink to new lows despite recent rebound
  • Rolls-Royce sees shares rebound more than 30% after confirming £2.5bn capital hike
  • British engine maker could see stock tumble amid ongoing fallout from Covid-19
  • Rolls-Royce may need a further £3.5bn in additional funds to survive, says JP Morgan
  • FTSE 100 set to struggle as no-deal Brexit appears inevitable

 

Analysts from JP Morgan opted to downgrade its rating for Rolls-Royce to 'underweight' and lower their price target for the stock from 80p to 65p, implying a potential downside of -58%.

The US-based investment bank also said that Rolls-Royce requires at least £6 billion worth of new equity in order to survive the economic impact of the coronavirus pandemic.

‘We believe [Rolls-Royce] needs new equity of at least £6bn, so we would expect more than one equity raise in the next 12-15 months,’ JP Morgan analyst David Perry said in a note.

Rolls-Royce is trading at 155p per share at the time of publication, with the stock down 77% year-to-date.

Covid-19 will push Rolls-Royce to the brink

Perry also warned investors in his note that Rolls-Royce will see total cash outflows of about £6.3 billion in 2020 and 2021, with net debt expected to hit around £20 billion next year.

His prediction is likely based on the coronavirus pandemic remaining a fixture until early 2022, with the World Health Organisation (WHO) admitting earlier this month that a viable vaccine won’t arrive until then.

‘The way that people are picturing it is that in January you have vaccines for the whole world and things will start going back to normal – it is not how it works,’ WHO chief scientist Soumya Swaminathan said. ‘Our best assessment is the middle of 2021 because at the beginning of 2021 is when you will start seeing the results of some of these trials.’

‘All the trials that are ongoing have follow-up for at least 12 months if not longer,’ she added. ‘That is the time you normally like to see to make sure you don’t have a long-term adverse effect after the first few weeks.’

FTSE 100 turns lower after recent gains

The FTSE 100 has been attempting to roll over since the rally into the key 5975 resistance level this week, according to Josh Mahony, senior market analyst at IG.

‘However, with price heading back into the 5915 swing-low established on Tuesday, a break below that point would signal a likely bearish phase coming into play,’ he added. ‘A break through the 5975 resistance level would negate this bearish short-term outlook.’

IG
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