Rolls-Royce Holdings PLC (LSE: RR.) has seen a slight increase in its stock value following additional positive feedback from analysts, with Bank of America raising its price target from 400p to 420p.
The bank is optimistic about the projected engine flying hours (EFH) for Rolls-Royce, anticipating them to reach 87% in 2023. It also foresees the possibility of Rolls-Royce setting its EFH guidance for 2024 at 90-100% relative to the levels in 2019.
Bank of America has adjusted its mid-term EFH forecasts to 109% and 117% for 2025 and 2026, respectively, compared to the 2019 figures.
For 2024, the focus is expected to shift towards enhancing pricing in long-term service agreements. The bank anticipates a turnaround from the negative one-offs of 2023 in 2024, positively impacting free cash flow (FCF), working capital, and capital allocation, especially once Rolls-Royce attains an investment grade (IG) status in 2024.
Consequently, Bank of America has revised its FCF projections for 2024-2026 upwards by 1-7%, following adjustments in pricing assumptions and an increase in EFH projections to align with the mid-term guidance.
As a result of these revisions, the bank has raised its price target for Rolls-Royce from 400p to 420p, while maintaining its Buy rating due to the company’s promising growth prospects and capital allocation flexibility.
Bank of America notes that despite Rolls-Royce being the top performer in its EU Civil Aerospace coverage for 2023, it still trades at a substantial discount compared to its peers. The bank acknowledges that Rolls-Royce should trade at a discount to pure civil aerospace companies like Safran, MTU, and Melrose, but anticipates a narrowing of this discount as Rolls-Royce’s margins and cash flow improve over the next year.
The bank also predicts Rolls-Royce will achieve an IG status by 2024, potentially leading to the resumption of dividend payments. Bank of America anticipates dividends of 3.5p per share in 2024, assuming a payout ratio of around 25%.
