Rolls-Royce Holdings PLC (LSE:RR.) shares could reach 600p under an upside scenario calculated by investment bank UBS.
“Rolls-Royce offers a compelling risk/reward ratio, though both risks and rewards are high: we see an upside scenario where the stock is valued at £6 and a downside scenario of £1,” the Swiss bank said in a note on Thursday.
The bank has nearly doubled its current price target to 350p from 200p and reiterated a ‘buy’ rating.
“We believe that 2023 guidance looks conservative, that Rolls-Royce could achieve £2 billion of FCF [free cash flow] as soon as 2024 and £2.8 billion of underlying FCF in 2026,” UBS said.
UBS now forecasts £1.5 billion group EBIT, higher than guidance of £1.2-1.4 billion, and free cash flow of £972 million, towards the top end of the £900 million-1 billion range. It believes management guidance is conservative on a large number of line items.
“Whilst we recognise the macro economic risks given the company's China exposure, our review of aircraft utilisation patterns over H1 suggests upside risk to flying hours in H2,” it added.
UBS sees 16.5 million engine flying hours in 2024, 8.5% ahead of consensus, and has doubled its free cash flow estimates for 2024-26, with smaller increases thereafter.
Shares rose 1.7% to 205.20p.