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Rolls-Royce wins over another sceptical broker

Kepler said the engineer’s defence business should benefit from a better US environment, while talks over the disposal of its commercial marine division continue
A Rolls-Royce engine
Even Rolls-Royce’s management cautioned that the turnaround plan is just a Powerpoint presentation at this stage

Management must have been convincing at last week’s capital markets day for Rolls-Royce Holdings PLC (LON:RR.) as another broker has upgraded the engineer.

Kepler has moved to ‘hold’ from ‘reduce’ and cranked up its price target to 975p from 815p after the power systems designer released “bold” mid-term free cash flow (FCF) targets at last week’s teach-in for research analysts.

READ: Rolls Royce has target price upped by Deutsche Bank over bullish outlook

Kepler said the targets may be bold but after crunching the numbers, it thinks the targets are credible.

Mind you, even Rolls-Royce’s management cautioned that the plan is just a Powerpoint presentation at this stage but Kepler said it does rest on credible assumptions.

For instance, reducing the operating expenditure cash deficit is feasible, given the apparently improved execution on new engines, such as the Trent XWB and Trent 7000, Kepler stated.

“The case for a steady increase in flying hours also stands, considering the increase in installed fleets and healthy traffic figures,” Kepler said.

The broker also welcomed the organisational restructuring, which will seek to simplify things in a company known for its bureaucracy.

Kepler thinks the £400mln cost-savings target is achievable, albeit at the expense of 4,600 jobs.

“Finally, management’s resolve, clear-sightedness and pragmatic approach are refreshing, bolstering the plan’s credibility,” Kepler said.

It’s not all sweetness and light and gin & tonics all round, however, as Kepler thinks the stock is still expensive versus its peers, based on enterprise value (EV) as a multiple of earnings before interest and tax (EBIT).

Based on Kepler’s forecasts for the year 2020, Rolls-Royce’s EV/Ebit is 16.1, whereas its peers are trading below 14.

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