Rolls-Royce Holdings PLC (LSE:RR.) offers investors an appealing long-term story, that’s according to analysts at Deutsche Bank (NYSE:DB), who have nudged their price target higher following positive interim results.
The target moves to 116p, from 113p, but stuck with a ‘hold’ rating and cautioned that short-term uncertainties linger.
“Rolls-Royce management presented lofty long-term goals, with civil Aerospace aspirational EBIT margin seen mid-teens thanks to better gearing post the restructuring and its annualised £1.3bn by end of 2022,” commented Deutsche analyst Christophe Menard.
The analyst added: “Rolls-Royce faces no liquidity issue and no financing needs, with debt maturities in 2024 and beyond.
“The intent is on reducing net debt from the £3bn H1/£4bn FY21 level and regain an investment grade rating. Disposal plan is proceeding as planned, with at least £2bn proceeds to optimise the balance sheet.”
Last week, Rolls-Royce revealed that it had returned to profit at the half-year and confirmed it is near to a sale of its ITP Aero division.
Bain Capital in combination with Spanish engineer Sener is in exclusive talks to buy ITP Aero for about £1.4bn, Rolls said last night after reports in the Spanish media. The sale is part of a £2bn disposal programme (the sale of Bergen Engines was announced yesterday) that is a key plank of Rolls-Royce’s attempts to rebalance its finances after the slump in travel flights due to the Covid pandemic.
Revenues in the six months to end-June 2021 still dropped slightly to £5.16bn (£5.67bn), but cost savings meant an underlying operating profit of £307mln against a £1.63bn loss a year ago while pre-tax profits turned round to £114mln against a £5.2bn deficit.
UBS last week lifted its price target to 130p, from 119p, reflecting that aero-engine maker has managed to contain and correct the civil aerospace cash bleed despite the low level of activity, while there was a good performance and payments in Defence.
Civil Aerospace though needs to deliver over a longer period, especially engine flying hours (EFH).
For both this year and 2022, UBS lowered its EFH forecast as the Delta variant spread is delaying the reopening of long-haul travel. UBS now sees EFH at 48% of 2019 levels in 2021 and 65% in 2022 – though 2023 is unchanged at 90%.