RE: JPM13 Dec 2022 14:34
Barclays said the opposite of JPM, these experts…
Rolls-Royce Holdings PLC (LSE:RR.) shares are being heavily shorted but there is potential for a “value unlock” around the corner, reckons Barclays.
Analysts at the bank have initiated coverage of the engine maker with an ‘overweight’ rating and a 110p share price target that compares to the previous close at 89.12p.
“Despite wide-ranging market cynicism, we see an inflection point coming,” said Barclays analyst Charlotte Keyworth, noting that currently the shares are an "overcrowded" short with around 6% short-interest.
“In our view, the market is anticipating another ‘reset’ when incoming CEO Tufan Erginbilgic (with a strong operational turnaround track record at BP) joins the business on 1 January 23.
“Whilst this may create price volatility near-term, we believe RR offers exposure to underlying [widebody] recovery including China, and self-help upside from the new CEO.”
Market sentiment about the widebody aircraft market in which Rolls specialises “is troughing”, the analyst noted, given widebody’s slower pace of recovery relative to narrowbody planes and exacerbated further by extended and worsening China lockdowns.
But positive industry commentary on the outlook has recently emerged from Boeing and Airbus, while the president of Emirates Airlines cited pent-up demand in China when Covid restrictions are lifted, saying “China will unleash demand, the likes of which we will not have seen for a long, long time”.
Keyworth said she sees “positive catalysts ahead on the tailwind of engine flight hour recovery”.
Key events on the path to restoring confidence in Rolls will be balance sheet deleverage (forecast to reach a net cash position by 2025), restoration of the dividend and “improving quality” of free cashflow.
An upside target price of 148p was also mooted based on faster-than-expected recovery in engine flight hours, self-help benefits from the new CEO and no execution issues and lower serviceable costs per engine.
The downside scenario, with a share price of 66p, envisions the impact of recessionary backdrop dampening air traffic growth, along with further Covid-related travel restrictions, inflation further lifting wage costs and higher investment demands than expected in electrical.
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