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Rolls-Royce shares slip as firm admits fresh engine problems

  • Rolls-Royce has admitted that an ongoing problem may be present in more than one model of its aircraft engines.
  • The firm is to carry out one-off inspections of 166 engines currently in service.
  • Rolls-Royce expected to update investors further at its capital markets day on Friday.
An employee fits the nose cone to a Trent 700 aircraft engine on the production line at the Rolls-Royce Holdings Plc factory in Derby, U.K.,
Chris Ratcliffe | Bloomberg | Getty Images

Rolls-Royce shares fell Monday after it was found that a problem affecting its engines powering Boeing's Dreamliner jets had been discovered in a different model.

The U.K.-listed company had previously admitted that 400 to 500 of its Trent 1000 engines were affected by problems with blades wearing out earlier than expected. Also known as "Package C," the engines are fitted to Boeing 787 planes and used by airlines including Air New Zealand, British Airways, Virgin Atlantic and Japan's ANA Holdings.

Now the firm has revealed that 166 of its "Package B" engines, in service on Boeing planes since 2012, must now undergo a "one-off inspection." Shares of Rolls-Royce lost more than one percent in value since the start of trade in London Monday morning.

In a statement to the London Stock Exchange, the U.K. engine maker said that the news will not affect its forecast 2018 full-year free cash flow target of around £450 million ($600 million).

Boeing Dreamliner 787
Source: Boeing
Boeing Dreamliner 787

The group has recently been trimmed from five into three businesses: civil aerospace, power systems, and defense. The simplification is part of a long-term turnaround plan, led by Chief Executive Warren East.

In March, the aero-engine maker said it was on track to meet its goals, after it beat 2017 forecasts and promised further cost-savings. That news saw shares surge 15 percent in one day but all of those gains have since been erased.

The firm is to hold a capital markets day Friday, at which it is expected to announce more than 4,000 job cuts from its current global workforce of 50,000.

In a note Monday, researchers at Swiss bank UBS said Friday's event would be "an important milestone in the company's attempt to rebuild trust with the market."

UBS said in order for investors to upgrade Rolls-Royce shares, the market would first need to understand how quickly the company can cut its costs and get more clarity on how badly the engine issues are affecting the business.

UBS said it currently forecasts Rolls-Royce to post free cash flow of £432 million in 2018 and £820 million in 2019.

Meanwhile, Barclays' aviation analyst Phil Buller told CNBC that since 2012, Rolls-Royce management had done a good job in cutting costs and had now secured a "baseline of profitability."

Buller said in an email Friday that while he had faith in Warren East's ability to further improve margins, the company's stated aim of topping £1 billion of free cash flow by 2020 may prove elusive.