Ahead of the Rolls-Royce Holdings PLC (LSE:RR.) capital markets day later this month, the aerospace engine maker has been garnering bullish comments from a number of bank analysts, helping its shares gain 18% over the past month to finally regain pre-pandemic levels.
Deutsche Bank was the latest, issuing an optimistic note lifting their fair value share price estimate 48%.
The CMD is expected to reveal strategic updates and cost-saving targets across its divisions, potentially marking a significant turning point in Rolls-Royce's trajectory, the analyst said.
The event could offset concerns raised by Emirates over alleged issues with the Trent XWB-97 engine, deemed "defective" by the airline's boss.
Flight data fuelling optimism
Also fuelling the optimism, UBS analysts revised their estimates for Rolls-Royce's engine flying hours, anticipating even higher activity than previously expected.
This adjustment has positive implications for the company’s cash flow, as flying hours are a critical revenue driver.
Morgan Stanley (NYSE:MS) shares this bullish view, suggesting that Rolls-Royce's cash flow potential is "significantly mispriced". With engine flying hours potentially exceeding initial forecasts, upward pressure on the company's cash flow guidance is anticipated.
More votes of confidence
Bank of America (BoA) also joins the chorus of positivity, listing Rolls as one of its top European stock picks.
BoA forecasts that engine flying hours (EFH) will reach 88.6% of pre-Covid levels, surpassing consensus estimates.
The CMD is expected to shed light on mid-term divisional targets, particularly in Power Systems and Defence.
BoA also believes that Rolls-Royce's balance sheet concerns are resolved, with an investment-grade rating likely by 2024, potentially leading to the return of dividends.
Challenges and opportunities
While the bullish reports focus on financial targets and strategic updates, the situation is not without its challenges.
The criticism from Emirates over the Trent XWB-97 engine highlights the ongoing negotiation complexities Rolls-Royce faces with major clients.
But Citigroup analysts suggest that Emirates' claims may be part of a broader commercial negotiation strategy, considering Emirates' recent order of Boeing's 777X jets with GE engines.