US broker Goldman Sachs has kept aero engine giant Rolls-Royce (LON:RR) on its conviction buy list, suggesting the market is underestimating the strength of the oil and gas market.
Goldman said its earnings estimates for 2012 and 2013 were 5 per cent and ten per cent ahead of the market consensus, reflecting its more bullish stance on the prospects in marine and energy and also for the recent Tognum acquisition.
The broker adds it is very bullish on Rolls–Royce’s exposure to the oil and gas capital expenditure cycle, where its oil and gas analysts expect the next 3-5 years to see the highest amount of new field development since the 1970s.
For 2011-2015, it forecasts new offshore oil and gas to grow by 20 per cent a year compound, with onshore O&G starts seeing a CAGR of 12 per cent.
Goldman also expects the recent acquisition of Tognum to produce underlying profits of €434 million in 2013, 19 per cent ahead of consensus estimates.
The broker has upgraded its share price target to 1050 pence from 1010p, based on a target 2014 estimated clean earnings multiple of 15 times and EV/EBITA of 12x.
This gives an implied valuation of 1143p, which Goldman discounts back by one year to give its price target.