Rolls-Royce Holdings plc (LON: RR) received an upgrade from Berenberg, moving from a ‘Sell' to a ‘Hold' rating, signaling a potential shift in market sentiment towards the aerospace and defense giant. The upgrade is underpinned by expectations of improved fleet dynamics through 2035 and ongoing operational improvements within the group.
Rolls-Royce's share price sits at 1,125 GBp at the time of writing, rising 1.99%. The share price has rocketed 91.20% year-to-date. Markets reacted to the revised outlook, carefully weighing the potential benefits against existing challenges. While Berenberg set a price target of 1,080 GBp, it's worth noting that other analysts have offered varied perspectives, contributing to a complex picture for investors.
Berenberg's analysis highlights a key driver: an increasing proportion of engines entering the “cash-without-cost” age bracket by 2035. This suggests a period of stronger free cash flow generation as engines mature and require less intensive maintenance. However, the German bank also acknowledges a potential headwind.
A declining share of engines over 20 years old, currently a profitable segment outside of long-term service agreements, could partially offset these gains. The firm forecasts an 8.8% compound annual growth rate in engine retirements from 2025 to 2035, resulting in a reduction of engines aged over 20 years from approximately 21% in 2024 to around 12% in 2035.
The bank estimates that Rolls-Royce's in-service engine fleet compound annual growth rate to 2044 will increase by up to 260 basis points if it gains share on the next-generation single-aisle programmes. The shares trade on a 2027 P/E of 31x and a free cash flow yield of 4.4%. Berenberg believes this offers limited scope for a further re-rating.
JPMorgan recently increased its price target for Rolls-Royce to 655 GBp from 535 GBp, maintaining an ‘Overweight' rating. Meanwhile, Redburn-Atlantic analyst Olivier Brochet raised the price target to GBP9.40 from GBP6.90, reiterating a ‘Buy' rating. This revision followed the company's full-year 2024 earnings release, which included an improved mid-term outlook.
Brochet has raised earnings per share estimates for 2025 to 2028 by 10%, 9%, 16%, and 23%, respectively, and free cash flow forecasts by 17%, 12%, 12%, and 32% for the same periods. The analyst's revised free cash flow expectations for 2025 are 9% higher than the company's mid-range guidance, projecting £3.06 billion compared to the guided range of £2.7 to £2.9 billion.
Barclays Bank also upgraded Rolls-Royce's rating from ‘Equal Weight' to ‘Overweight', increasing the price target from 239p to 270p. Barclays views the previous share decline as an investment opportunity, anticipating stock growth potential, particularly with the upcoming Capital Markets Day.
The consensus among five contributing investment analysts points to a ‘Moderate Buy' rating for Rolls-Royce Holdings plc. This rating has remained stable since June 2024, following a change from a ‘Hold' consensus. The latest recommendations include three ‘Buy' ratings and two ‘Hold' ratings.
Analyst Summary: Bull and Bear Cases
Bull Case:
- Berenberg upgraded its rating from ‘Sell' to ‘Hold', citing improved fleet dynamics and operational enhancements.
- A growing number of engines are expected to enter a “cash-without-cost” phase by 2035, potentially boosting free cash flow.
- Multiple analysts hold positive outlooks, with JPMorgan, Redburn-Atlantic, and Barclays all issuing ‘Overweight' or ‘Buy' ratings and increased price targets.
- The consensus among analysts is a ‘Moderate Buy', reflecting a generally positive sentiment.
Bear Case:
- Berenberg's analysis suggests limited room for further re-rating, with the stock trading at a high 2027 P/E of 31x.
- A declining share of highly profitable engines aged over 20 years could act as a headwind against cash flow improvements.
- The bank forecasts a significant compound annual growth rate of 8.8% in engine retirements, which will reduce the size of the lucrative older fleet.
- Despite upgrades, Berenberg's rating is only a ‘Hold', indicating caution and that significant challenges remain.
These varying perspectives suggest a market grappling with both the potential upside and inherent risks associated with Rolls-Royce. The company's operational improvements and favourable fleet dynamics are encouraging, yet headwinds related to engine lifecycles and market competition remain relevant considerations. The market will likely continue to monitor Rolls-Royce's performance and strategic execution closely, particularly as the company navigates evolving industry dynamics.
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