- Jefferies upgrades to buy
- Price target increased from 90p to 125p
- Material upgrades to cash flow forecasts
An improvement in expected cash flow performance is a key driver for Jefferies analyst Chloe Lemarie to upgrade aviation engineer Rolls-Royce (RR.) from ‘hold’ to ‘buy’ with an enhanced 125p price target.
Shares in the company responded to the broker upgrade with a 6.6% gain to 99.4p. Though, for context, this still leaves the stock at less than half its pre-pandemic levels.
Covid restrictions inevitably had a disastrous impact on Rolls given how reliant its profitability is on lucrative spares and repairs revenue on an installed base of aircraft engines.
This revenue stream is directly linked to the number of hours planes are in the air and with most flights grounded, Rolls dropped firmly into the red and saw its balance sheet come under significant pressure.
However, Rolls’ problems predate the pandemic and saw a significant descent in the shares in the years leading up to it. Chief among its difficulties was an inability to convert profit into cash flow.
BIG CASH FLOW UPGRADES
That explains the significance of Lemarie’s upgrades to cash flow forecasts unveiled today. She has upgraded 2022, 2023 and 2024 free cash flow by 22%, 9% and 2% respectively, in part on an increase in flight hours.
This puts free cash flow at 73% of pre-pandemic levels in 2023 and 95% in 2024 - which Lemarie suggested is ‘conservative’.
She commented: ‘We see a number of positive catalysts for the group in 2023 including potential credit upgrades & further flight hours recovery which should build confidence on the group’s mid-term potential.’
Notably she has also added New Market opportunities within her sum-of-the-parts valuation for 2024 - suggesting the time when investors start to take this part of the business seriously is moving closer.
This division, which encompasses investments in areas like modular nuclear power and electrification, may form an increasingly important component of new CEO Tufan Erginbilgic’s plans moving forward.
