Credit Suisse ups target for Rolls Royce, but stays at 'underperform'

Analysts at Credit Suisse have marked-up their target price on shares of Rolls Royce on expectations for operating profits to almost triple over the next four years.

According to the Swiss broker, operating profits on an IFRS 15 basis were set to jump from £502m in 2018 to £1.384bn by 2021, driven by the improved performance of its Civilian aerospace arm, where earnings were seen reaching about £400m in 2020, versus £330m of red ink in 2017.

Growth in cycle businesses at the Power Systems unit would also play a hand, they said.

In parallel, cash flow was seen improving from roughly £472m in 2018 to £1.036bn by 2020, thanks to growth in the Trent installed fleet.

However, there were risks to navigate, including its Capital Markets Day in mid-June to discuss its restructuring programme and the stronger pound.

Even so, and on the expectation of a 7% free cash flow yield in 2020, the analysts moved their target price from 720p to 785p, although they kept their recommendation at 'underperform'.

"We believe that this level appropriately reflects the expected improvement in cash and a view that the cash inflows from long term service agreements should not be reflected at full value. They are indeed representative of future revenues, in our view, not futureprofits. Most of them will arise from the Trent XWB fleet, for which the main service cost elements are still uncertain as there is no shop visit history yet."