RE: Another price hike incoming!19 Dec 2023 13:30
Rolls-Royce Holdings PLC (LSE:RR.) is set for another good year with a number of positive catalysts expected to drive the share price higher.
That was the view of Bank of America which has increased its price target for the FTSE 100-listed engineering group to 420p from 400p.
The bank expects Rolls-Royce to report engine flying hours (EFH) at 87% in 2023 but sees scope for Rolls to guide for EFH at 90-100% versus 2019 levels in 2024.
BofA has also increased its mid-term EFH assumptions to 109% and 117% versus 2019 levels for 2025 and 2026, respectively.
Looking ahead to 2024, the broker thinks a key focus will likely be pricing improvement in long-term service agreement contracts, with 2023 negative one-offs expected to reverse in 2024, benefitting free cash flow (FCF), working capital dynamics and capital allocation once it achieves an investment grade (IG) profile in 2024.
BofA has increased its 2024-26 FCF estimates by 1-7% after raising assumptions on pricing and increasing EFH levels to be in line with mid-term guide.
"We reiterate our Buy rating on the strong growth outlook and cap allocation optionality," it said.
The bank pointed out while Rolls has by far been the best performer in its EU Civil Aero coverage in 2023 it still trades at a significant discount to peers.
"We believe that Rolls deserves to trade at discount to pure civil aero peers, such as Safran, MTU and Melrose" but "see scope for this level of discount to close as Rolls' margins and cash flow improve over the next 12 months".
It expects Rolls to be at an IG profile in 2024, which should trigger resumption of dividends.
BofA has pencilled in dividends of 3.5p per share in 2024 by assuming c.25% pay-out
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