UBS has put Rolls-Royce Holdings PLC (LSE:RR.) on its 2026 European 'conviction Buy' list, arguing in a note that the market is still not fully pricing the engineering group’s longer-term earnings and cashflow potential as its Civil Aerospace turnaround continues.
The Swiss bank’s base case assumes Civil Aerospace margins of 22.5% in 2028, above management’s 18-20% guidance, with UBS pointing to ongoing scope for pricing improvements, cost control and “time on wing” gains.
While UBS thinks the engine aftermarket is “close to its peak”, it believes Rolls-Royce is relatively insulated versus peers.
The note highlights a younger fleet (around 60% of flying hours on new-generation Trent engines), recent flying-hours growth ahead of peers, a widebody skew, and a thesis rooted in company-specific self-help rather than the cycle.
UBS also sees an underappreciated second leg of upside in Power Systems, lifting its view of Power Generation sales growth and modelling 2028 Power Systems EBIT of about £1.9 billion, with margins at 23%, well above the 14–16% guided range.
Overall, UBS models £5.9 billion of EBIT and £5.6 billion of free cash flow in 2028, noting investor expectations closer to £5.1–£5.4 billion.