Target upgrade for Rolls-Royce as confidence grows

Cheaper Rolls-Royce Holdings (LSE:RR.) shares following a profit warning by Airbus SE (EURONEXT:AIR) today stirred retail buying interest on the day that a City bank upped its price target to 555p.

Revisiting its valuation ahead of half-year results on 1 August, Deutsche Bank said its upgrade from 465p reflected increased confidence that Rolls will deliver on 2027 targets.

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Its new estimate represents further upside of more than 20% for the FTSE 100-listed stock, which has soared from 152p in July 2023 to last week’s peak of 488.5p.

Rolls has since retreated to its lowest level of the month at 453.3p, including today’s reverse of 18p, after the warning by Airbus that supply chain challenges have continued, which has led to weakness for stocks across the aerospace sector.

The Rolls decline to its lowest level since early June was seized upon by some retail investors, who chose to top up their holdings or get on board for the first time.

Rolls was this morning’s most traded share on the interactive investor platform, with the vast majority of these dealings to buy the shares.

The surge in demand came despite Airbus warning that it now expects about 770 civil aerospace deliveries in 2024 compared with a previous forecast of 800 in April. It also pushed back its target for a production rate of 75 A320 family aircraft a month from 2026 to 2027.

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The company said last night: “Airbus is facing persistent specific supply chain issues mainly in engines, aerostructures and cabin equipment.”

Its relationship with Rolls is focused on the widebody market, with the fuel-efficient Trent XWB engine powering the A350 family of aircraft and the Trent 700 on the A330.

The warning comes after Rolls chief executive Tufan Erginbilgic warned in February’s annual results that supply chain challenges were likely to continue for 18-24 months.

He reiterated the issue in the company’s most recent trading update in May, when he told the AGM that his work to turn Rolls into a “high-performing, competitive, resilient and growing business” was continuing with pace and intensity.

Among Erginbilgic’s medium-term targets are to quadruple operating profit from the 2022 baseline to £2.5-2.8 billion and for an operating margin at least as competitive as peers. He is also looking to grow sustainable cash flows to between £2.8-3.1 billion.

His confidence in May that guidance for 2024 will be met has underpinned City expectations for further upside in the share price, with UBS last week highlighting a price target of 550p. Recent credit rating upgrades by Fitch and S&P have also boosted hopes that Rolls will soon be in a position to resume dividend payments.

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Deutsche Bank added today: “The first quarter update provided evidence that execution at Rolls-Royce is improving.

“While our 2024-2027 estimates are broadly unchanged, our degree of confidence in the company's ability to deliver on its transformation programme has increased.”