Rolls-Royce shares receive further boost from fellow aero supplier

They’re up 75% since mid-October, and the good news keeps coming as Rolls tries to keep its recovery on track.

Optimism in the aerospace sector continues to build after a profits upgrade by Airbus supplier Senior (LSE:SNR) gave added thrust to the new year recovery for Rolls-Royce Holdings (LSE:RR.) shares.

FTSE 100-listed Rolls traded as high as 112p at one point today, a level that compares with just 64.4p in mid-October and 87.3p as recently as last month.

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The turnaround for the Rolls valuation has been reflected elsewhere in aerospace after jet fuel prices stabilised and the travel industry reported some encouraging booking trends.

British Airways owner International Consolidated Airlines (LSE:IAG) added another 2p today and stands about 30% higher over the past month, while easyJet (LSE:EZJ) is up 39% over the same timeframe.

Liberum analyst Gerald Khoo hiked his target prices on both stocks today, taking easyJet to 500p and IAG to 220p. He added: “We see headroom for the demand/supply balance to remain favourable with capacity mostly still below 2019 levels.”

Ryanair increased its profits guidance earlier this month and Deutsche Bank believes that near-term consensus expectations for Wizz Air Holdings (LSE:WIZZ) may still be too prudent. Low-cost rival easyJet is due to publish a trading update on Wednesday, before Wizz on Thursday.

Deutsche Bank today hiked its airline target prices by 18% on average, “suggesting that the market has been quick and efficient to price in the superior operating environment”.

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The backdrop of improving demand should raise hopes that Rolls will show further recovery in engine flying hours and in its balance sheet position in annual results on 23 February.

When it last reported in November, Rolls said large engine flying hours were at 65% of 2019 levels in the four months to the end of October and up 36% year to date.

It said this reflected an uneven recovery around the world, with stronger performances in the US and Europe but lower travel in China and Asia. Since then, Beijing has relaxed Covid travel restrictions and major airlines worldwide have reported improved booking trends.

Analysts at Jefferies believe each percentage point of recovery in flight hours versus pre-pandemic levels will add around £30 million to free cash flow as Rolls attempts to return to an investment grade credit profile in the medium term.

The recovery prospects will have been boosted by today’s update from Senior, whose aerospace division serves both the commercial and defence sectors with components and systems for structures, fluid conveyance and gas turbine engines.

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It said recent trading at the end of last year in its aerospace division had been in line with hopes, with its smaller flexonics unit ahead of expectations after strong demand from customers in the heavy-duty truck and power and energy markets.

Senior shares jumped 11.4p to 147.8p and were at an 11-month high of 153p at one point as the FTSE 250-listed company forecast 2022 profits towards the top end of the City’s range of between £16.2 million and £18 million. The annual results are due on 27 February.

Analysts at Jefferies reiterated their buy recommendation alongside a 190p target price following the brief trading update.

The US bank said: “We continue to see Senior as having significant recovery potential, across both divisions. This recovery potential will come through the top and bottom line, and looks well underpinned given the end market dynamics of both divisions.”

The mixed macroeconomic backdrop and supply chain challenges are a concern but Jefferies said the company appeared to be well positioned.

It added: “While aerospace's recovery has lagged that of flexonics, the potential for this division's end markets remains very positive, and has arguably strengthened in the last few weeks and months.”

Prior to the pandemic, the shares were trading at 180p but had been as high as 317p in 2018. The Hertfordshire-based group turned down an approach at 176p a share from private equity's Lone Star in May 2021, saying it fundamentally undervalued its business.