Trading update preview: still confident about Rolls-Royce?

The case for Rolls-Royce Holdings (LSE:RR.) shares above 600p was today reiterated by a leading City firm, even though it doubts a forthcoming trading update will provide the catalyst.

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UBS continues to believe Rolls deserves to be trading 20% higher at 640p, having upgraded to this level after the company’s beat-and-raise set of half-year results on 1 August.

The Swiss firm has been ahead of one of the biggest FTSE 100 turnaround stories ever since switching to a Buy stance and 200p target when shares were at 153p in March 2023.

Source: TradingView. Past performance is not a guide to future performance.

The bank left its estimates unchanged today as it expects third-quarter figures on 7 November to show weak near-term engine flying hours offset by strong management commentary.

It said: “We expect continued confident language on the long-term turnaround and indications that new long-term guidance will be provided at full-year results, but with no new targets communicated at this stage.”

The bank’s tracking of large engine flying hours (EFHs) points to 100%-101% of pre-pandemic 2019 levels in July-August and about 102% in September. This compares with the company’s full-year guidance in the range of 100-110% of 2019’s level.

Continued strong demand for travel and the company’s young, growing wide-body fleet meant large EFHs rose by 22% on a year earlier to 101% of 2019 levels in half-year results.

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The recovery helped Rolls to upgrade its free cash flow guidance for 2024 to £2.1-2.2 billion from £1.7-1.9 billion seen previously. The new guidance, which helped shares top 500p for the first time, also included operating profits between £2.1 billion and £2.3 billion.

The progress has left Rolls in a position to declare a dividend payout equivalent to 30% of post-tax underlying profit when it presents February’s 2024 results. It then intends to target an ongoing pay-out ratio of 30-40% each year.

UBS noted at the time of the interim results that the revised 2024 guidance by Rolls was already equivalent to 75% of 2027 profit and 65% of free cash flow targets.

It said today that the scale of the transformation progress meant that near-term updates on engine flying hours were now less of a priority for investors.

The shares jumped 220% in 2023 and are up by another 75% so far in 2024 as chief executive Tufan Erginbilgic continues his “relentless focus” on commercial optimisation and cost efficiencies across the group.

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He has done so in a challenging supply chain environment, with the company expecting these conditions to persist for a further 18-24 months.

Components supplier Senior (LSE:SNR) highlighted the tough backdrop earlier today when it said its aerospace division’s second-half performance is likely to be weaker than first.

It reported “temporary but significant headwinds”, having been told by a Tier 1 Airbus supplier that Senior’s delivery schedules will be impacted until the second quarter of next year.

Airbus is due to post third-quarter results on 30 October, with a delivery guidance downgrade now the base case scenario for analysts at UBS. The bank models 750 deliveries in 2024, against current guidance of about 770.