How will Rolls-Royce and BAE fare in 2025?
Rolls-Royce continues to fly up the FTSE 100, while 2024 has also seen record highs for BAE Systems. A City firm has examined aerospace and defence prospects in 2025.
5th December 2024 15:32
by Graeme Evans from interactive investor
A bullish forecast for Rolls-Royce Holdings (LSE:RR.) shares in 2025 has raised the prospect the £50 billion-valued engines giant will soon rank among the 10 largest companies in the FTSE 100 index.
In its year ahead preview for the aerospace and defence sector, Bank of America reiterated its Buy recommendation with a new 850p price target for the hotly performing Rolls shares.
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That’s a further 40% upside on today’s record level of 595p, having doubled in value from £25 billion during this year as traders anticipate the resumption of dividend payments and the early delivery of 2027 profit and cash flow targets.
Rolls is now the 12th largest company in the FTSE 100 index, having overtaken the likes of National Grid (LSE:NG.), Glencore (LSE:GLEN) and BAE Systems (LSE:BA.).
The shares were less than 100p in early 2023, when newly appointed chief executive Tufan Erginbilgic likened the engines giant to a “burning platform”.
His “relentless focus” on commercial optimisation and cost efficiencies has since bolstered City confidence in the face of a challenging supply chain environment.
The valuation has also benefited from a re-rating of aftermarket names during 2024, reflecting the impact of Airbus and Boeing delivery issues for the pricing and outlook of older engines.
Bank of America said in its note: “The aftermarket sub-segment is trading near long term highs in the US, and in Europe. While we see some scope for re-rating in specific names (Rolls), we don't see another year of 20-30% re-rating for the aftermarket subsector.”
Instead, it expects that 2025 will see a strong re-rating of original equipment makers relative to aftermarket names as the engine supply chain situation is set to improve materially.
This means its top civil aerospace pick for 2025 is Airbus SE (EURONEXT:AIR) with a price target of 180 euros.
In a sector where balance sheets are supportive of an improving shareholder return outlook, it sees scope for buybacks at Airbus, Safran SA (EURONEXT:SAF), Rolls and Melrose Industries (LSE:MRO) in 2025.
However, the bank draws particular attention to the Rolls capital return story 2025-27 and the cheapest aftermarket valuation globally with a 7.5% free cash flow yield in 2026.
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On GKN Aerospace business Melrose, the bank says this year’s de-rating has created an attractive entry point given hopes for improving cash generation every year through to 2030.
BAE Systems shares have experienced another robust year after rising 11% to close the valuation gap versus other US-focused peers. Its valuation now stands at £38 billion.
However, BofA is more cautious about prospects for 2025 after it lowered its price target by 9.8% to 1,240p: “We see very limited margin expansion through 2026 due to negative revenue mix and don't see catalysts to drive further re-rating into 2025.”
In the US, a growing focus on budget efficiency could weigh on sentiment for exposed names such as BAE. The bank believes the outcome of November’s elections is likely to be more positive for those stocks with EU exposure, given that during his previous term Donald Trump ramped up pressure on other NATO members to meet their defence commitments.
The bank has also downgraded FTSE 250-listed QinetiQ Group (LSE:QQ.) from 470p to 405p as it sees lower growth and margin expansion versus peers.
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