UBS gave a boost to jet engines giant Rolls-Royce Group PLC (LON:RR.) after the Swiss bank raised its rating for the “unloved stock” to ‘buy’ from ‘neutral’ with an 835p target price, up from 800p.
In mid morning trading, R-R shares on the FTSE 100 index were up 1.4%, or 9.0p at 676.5p.
In a note to clients, the bank’s analysts said: “RollsRoyce is an unloved stock, with a high level of scepticism about management's ability to deliver adequate levels of free cash flow in 2018-20.”
However, they added: “We believe investors ascribe little value to cash improvement in 2019/2020. Over 2017, we think investors will gain more comfort on management's ’grip’ on the business.“
The analysts estimate that R-R’s cash generation will be close to £850mln in 2019 and £1.1bn in 2020.
They noted that 2016 was the first year without warnings by R-R since February 2014, and the 2016 outlook was even raised slightly in January.
Defence spending …
The analysts said UBS is “getting more constructive on the short-cycle industrial end markets”, and retains “a positive stance on the defence spending outlook in the US and the UK.“
They added: “Positive news on these businesses should translate into good cash flow generation (c80%, on average), supporting the overall group cash improvement. “
In its civil aerospace business, the analyst said: “RR is below peers in terms of sales per employee and inventory turns, and should benefit from cost cutting, higher volumes and favourable FX.“
R-R’s full-year results are due on February 14.