Propulsion systems designer Rolls-Royce Holdings PLC (LON:RR.) is ready to move up a gear, according to Credit Suisse.
The Swiss bank has responded to the engine maker's trading update last Friday by upgrading the stock to 'neutral' from 'underperform', saying the upgrade reflects the credible changes made to the company's structure.
READ: Rolls-Royce shares soar as it again maintains full-year guidance despite upping costs for Trent engine issues
The target price moves up to 930p from 780p, a few pence above the current share price, which is 925.2p, down 2.6% on the day.
At a capital markets day last week, the company outlined plans to decentralise and the proposed modifications, in Credit Suisse's view, should structurally modify how the company functions and its underlying profitability.
The bank noted that one key risk of a highly decentralised structure is a loss of control but Credit Suisse (CS) said the chief executive dealt with that question “in a very reassuring and convincing way” at the analysts' preparation.
There still remain some risks to holding Rolls-Royce shares, such as a failure to implement the restructuring adeptly while “avoiding in-service issues on the Trent XWB” is also critical.
CS's upgrade means it now shares the same position on Rolls-Royce as JP Morgan, and the US broker is not shifting its neutral view, despite what it said was “impressive ambition” from Britain's engineering champion.
The company still has a lot to prove, JP Morgan (JPM) said, although it did respond to the restructuring announcement by making three changes to its forecasts.
It has increased its forecast free cash flow (FCF) for 2020-21 by £200-300mln a year, cut its earnings per share (EPS) forecasts for 2020-21 by around 5-10% a year, and has incorporated the £500mln cost of restructuring in the JPM defined clean EPS and FCF forecast, spread over 2018-20.
The price target moves up from 800p to 965p.
“We think the c14% rally in the shares on 14-15 June has discounted the new 2020 FCF guidance (and RR's new “ambitions for 2024”) so we remain Neutral,” JPM concluded.