Rolls-Royce boosted by Goldman upgrade to 'buy'
Goldman Sachs has upgraded aerospace and defence group Rolls-Royce to ‘buy’ from 'neutral', lifting the price target to 1,030p from 743p and adding the stock to its ‘Conviction’ list, saying the company has the potential to substantially increase free cash flow between now and 2020.
Aerospace and Defence
10,383.65
16:59 19/04/24
FTSE 100
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16:59 19/04/24
FTSE 350
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16:59 19/04/24
FTSE All-Share
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Rolls-Royce Holdings
395.50p
16:40 19/04/24
The bank noted cash performance at Rolls-Royce has been disappointing as underlying earnings performance has fallen and the investment burden has risen.
It argued that the diversified nature of the group and the impending accounting changes warrant a cash flow based valuation approach. GS said it expects company-defined free cash flow to improve from £120m this year to £495m in 2018, £1.02bn in 2019 and £1.55bn in 2020.
Goldman said key risks to its price target and view include a weakening of the pound versus the US dollar through this year which would put downward pressure on sales estimates.
In terms of earnings, the impact would be of a lesser magnitude as a result of the substantial hedge book Rolls-Royce has in place, although large moves in $/£ will still affect the share price.
It also pointed to negative momentum in defence spending in the core markets of the UK and the US, as well as major export markets such as Saudi Arabia, as these markets are driving the growth in newer programs which offsets declines in older products.
Continued declines in sanctioned offshore capex would pressure future revenues in the Marine division from the Offshore exposed business lines.
At 0806 GMT, the shares were up 4.6% to 696.50p.