Shares of Rolls-Royce Holdings PLC (LSE:RR.) are ‘abnormally cheap’, according to a research note from UBS, prompting the investment bank to upgrade its rating to ‘buy’.
It sees China's reopening as an important and ‘underappreciated catalyst’ for the jet engine maker that could bring valuations back into line with historical norms.
It also sees the appointment of new chief executive Tufan Erginbilgic as an additional potential value kicker.
In the note to clients, it also flagged the potential reputational risk of a miss or downgrade to 2023 numbers.
In order to achieve the £600-800m 2023 free cash flow guidance, a large portion of the 2022 inventory build needs to be reversed, as well as a further £150m of overdue receivables collected, UBS cautioned.
Both are possible, but if supply chain pressures fail to ease, which is outside of management's control, it could be at risk, it went on.
In a big upgrade, it almost doubled its price target for Rolls stock to 200p from 105p previously. Its ‘downside scenario’ is 90p and its ‘upside’ fair value 300p.
Of the 17 banks and brokerages logged as following the jet engine maker, only seven are positive on the stock. The consensus price target is 124p.
Just before midday, the share price was 157.74p, up 3%.