Analysts believe that the aircraft engine maker’s shares, up 8% this year, have more room to grow.
- Rolls-Royce (LON: RR) shares climbed as much as 1.4% on Tuesday (17 August 2021)
- JPMorgan analysts lifted their price target on RR to 130pence earlier in the day
- They also raised their earnings forecasts for the next three years
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JPMorgan raises Rolls-Royce stock price target
Rolls-Royce’s share price performance is expected to improve in the coming months on the back of higher earnings, according to JPMorgan analysts.
The analysts lifted their price target on the aviation engineer’s stocks to 130pence a share from 105p, while raising their earnings forecasts over the next three years jump by 49%, 31% and 25% respectively.
The higher forecasts also take into consideration potential structural challenges, including the recovery of long-haul flights, JPMorgan added in a note on Tuesday.
The firm also predicted that a reported sale of the group’s Spanish unit ITP Aero to consortium-led investment house Bain Capital for a rumoured €1.6bn (£1.5bn) could boost free cash flow to around £750 million by 2023.
Finally, the analysts noted that Rolls-Royce’s first half underlying profits for 2021 beat consensus estimates by £536m, which indicated that its cost-cutting programme is starting to pay off.
Rolls-Royce shares rallied as much as 1.4% following JPMorgan’s price target upgrade.
Across the board, Rolls-Royce currently has a consensus rating of ‘hold’ and price target of 198p, based on the latest analyst data published by MarketBeat.
The price target equates to a potential 78% price upside from the stock’s latest price of 111.28p.
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*Based on revenue excluding FX (published financial statements, June 2020)
Rolls-Royce profitable in H1 2021, but 2022 in doubt
Last week, the FTSE 100 company returned to the black, after reporting an underlying operating profit stood of £307 million for H1 2021, a reverse from H1 2020’s £1.63 billion loss.
Underlying revenue, meanwhile, dipped 3.4% to £5.23 billion, from £5.41 billion in the year-ago period.
Rolls-Royce’s resilient defence unit, which makes engines for military jets and powers nuclear submarines, buttressed the group’s 1H 2021 performance.
The aircraft engine maker also said in the same release that it was on track to meeting its forecasts for 2021, with cost reductions and asset sales helping to tide it through a gradual recovery in long-haul travel.
However, Rolls-Royce flagged that its 2022 goals could be delayed, as flying hours did not rebound quickly enough. The group had earlier expected to reach free cash flow of £750 million as early as next year. ‘The exact rate and timing of return is out of our control,’ said Rolls-Royce CEO Warren East.
Nevertheless, the company maintained its guidance for free cash outflow to improve to £2 billion this year, and for cash flow to turn positive in 2H 2021.
Kelvin Ong | Financial writer, Singapore
18 August 2021