Rolls-Royce soars after issuing ambitious mid-term goals

By Sarah Young

LONDON (Reuters) - Britain's Rolls-Royce said it would exceed its 2020 guidance as it announced new ambitious mid-term goals, sending its shares up to four-year highs just one day after announcing a major job cuts programme.

The maker of engines for civil planes, military jets and ships has been in turnaround mode since 2015, and following a cost-saving plan revealed on Thursday, it told shareholders on Friday the foundations were in place for it to deliver higher returns in future.

Rolls said it was well-placed to exceed a target of generating free cash flow of 1 billion pounds by 2020, and that in the mid-term it was aiming for free cash flow per share to exceed 1 pound, up from the 15 pence per share it made in 2017.

Shares in Rolls-Royce opened up 13 percent to trade at 999 pence at 0727 GMT, its highest level for four years.

Jefferies analyst Sandy Morris said that the free cash flow per share of over 1 pound, meant that free cash flow itself would come in at about 1.9 billion pounds in the mid-term.

"It's told us that in the mid-term, that's about four years or five years, it can do 1.9 billion pounds. If it does that then it's a cheap stock," he said.

Meeting such targets would go some way to answer critics who have said that the company has long underperformed rivals such as GE which make higher margins.

The prospect of higher free cash flow also hints at a bigger payout for shareholders after they saw the dividend halved in 2016. Since then it has said any improved shareholder returns will be linked to its free cash flow performance.

Despite Rolls's confidence in the mid-term, in the short term the engineering company remains under pressure from airline customers due to ongoing issues with parts not lasting as long as expected on the Trent 1000 which powers the Boeing 787.

It said on Friday the engine issue could lead to additional cash costs of 100 million pounds in 2018, but that it was sticking to guidance for this year's free cash flow to come in at about 450 million pounds ($643 million), give or take 100 million pounds.

It said it would be able to offset those costs through "short-term discretionary cost mitigation actions".

(Reporting by Sarah Young; editing by Kate Holton)