Goldman Sachs reinstates Rolls-Royce at 'buy'

Goldman Sachs reinstated coverage of Rolls-Royce at ‘buy’ with a new price target of 966p.

“Following a 48% fall in the share price since the beginning of 2014 and profit warnings in three major end markets, we believe the current valuation fails to reflect Rolls-Royce’s cash flow improvement, despite weak earnings growth,” it said.

It noted Rolls-Royce is due to release a third-quarter update on 12 November and will host an Investor Day on 24 November to update investors on the ongoing operating review. It reckons the focus on the medium-term outlook at this update could be supportive for the shares.

GS said that given the diversified nature of the group and the complicated accounting structure, it favours a cash flow-based valuation method. On this method, it sees almost 50% upside to its new 12-month price target.

The bank added that it continues to have a positive view on the long-run outlook for the civil aerospace market, which is reflected in its growth forecast for RR’s Civil Engine business.

At 1027 BST, Rolls-Royce shares were up 2.2% at 665.60p.