Rolls-Royce PLC (LON:RR.) shares rose on Wednesday as Credit Suisse upgraded its rating to ‘outperform’ from ‘neutral’ as it believes the engines maker’s issues with its Trent 1000 aerospace power unit “appear to be on the mend”.
The Swiss bank also raised its target price for the FTSE 100-listed stock to 1,065p from 900p, with the shares currently trading at 940.40p, up 2.9% on Tuesday’s close.
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In a note to clients, Credit Suisse’s analysts said: “The Trent 1000 (powering the 787) has been the key execution impediment to the case and it now appears to be showing signs of improvement.”
They added; “A technical fix for the main issue has been certified at the end of December 2018 and has just started to be installed on grounded engines. Storage data shows that the number of parked aircraft/engines has been reducing steadily for four months now, reducing the pressure on both airlines and Rolls-Royce.”
The analysts pointed out that with the Trent 1000 issue back on the right path, a key downside risk to the group’s free cashflow (FCF) expectations would be lifted.
They said they believe that investors “can now concentrate on 1/ the pace of the reorganisation launched in June 2018 (no signal that it is not on track) and 2/ the Trent XWB strong performance (critical to the FCF generation via both the reduction in unit costs and the absence of fundamental in-service issues).”
The analysts said they are now more comfortable with the ability of Rolls-Royce to deliver on its 2020 target for FCF of around £1bn.
They added that their new price target reflects its move to a 2020 estimated FCF yield target of 5.5%, versus 6.5% previously, closer to the 5.2% long term average for the group.