The Rolls-Royce Holdings PLC (LON: RR) share price increased after UBS upgraded its rating on the firm from neutral to buy and upped its price target to 200p from 105p. Investors reacted positively to the news, as evidenced by the rising RR shares.
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The investment bank highlighted the reopening of China as a critical factor behind the upgrade, given that China and Asia accounted for 51% of 2019 wide-body traffic in 2019. The Chinese weakness alone accounted for over 40% of the absolute wide-body plane traffic reduction in 2022 compared to 2019.
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Rolls Royce shares are up 116% since the year started as investor sentiment towards the company remains optimistic. The company has met and exceeded investors' expectations this year, driven by the new strategy implemented by its recently appointed CEO, Tufan Erginbilgic.
Therefore, UBS believes that the reopening of China’s air travel sector is a critical, undervalued catalyst that could bring valuations back into line with historical norms. UBS said the wide-body plane market may be less structurally challenged than the consensus estimate.
The bank noted that Tufan Erginbilgic’s investor briefings had gone well so far and that his strategy to turn around the company was also progressing according to plan. Therefore, the bank is quite confident in Rolls Royce’s prospects.
There are numerous reasons to be optimistic about Rolls Royce’s share price, although the shares are trading sideways after this year’s impressive rally.
UBS Analysts said: “We believe management's 2023 cash flow guidance is a key risk; a miss or downgrade here would reset the reputational uplift achieved so far. In order to achieve the £600- 800m 2023 free cash flow guidance, we believe a large portion of the 2022 inventory build needs to be reversed as well as a further £150m of overdue receivables collected.”
The investment firm added that a significant risk is posed by supply chain challenges, which are out of the company’s control. The supply chain bottlenecks and other risks could hinder the plane engine manufacturer from achieving its full potential, as outlined in its guidance.
Rolls Royce (LON: RR) share price.
The Rolls Royce (LON: RR) share price edged 1.66% higher to trade at 205.05p, from Thursday’s closing price of 201.95.
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