JP Morgan says Rolls Royce's EPS and free cash flow upgrades 'somewhat low quality', stays underweight

Analysts at J.P.Morgan raised their target price for shares of Rolls Royce but kept their recommendation at 'underweight', telling clients that the engineer's raised forecasts for earnings per share and free cash flow were "somewhat low quality".

They also termed the new chief executive officer's turnaround plans for the engineer as "risky".

On the positive side of things, they upwardly revised their EPS estimates for 2023-25 by 84%, 34% and 29%, respectively. So too, their estimates for Rolls' free cash flow over the same time frame were raised by £200-250m for each of those years.

Negatively, their estimate of the company's adjusted net debt increased by £500m per year.

The analysts also highlighted the scant commentary from management around Rolls' low market share in the market for Trent 1000 engines and the high risks around the LTSA business model.

Regarding Tufan Erginbilgic's turnaround plans "so the proof will be in the delivery, not the statement of intent", they said.

"It seems that Mr Erginbilgic aims to de-lever RR’s balance sheet organically; we believe this is a risky strategy and leaves RR highly vulnerable to any unexpected shocks in the next few years."

J.P.Morgan raised its target price for the shares from 70.0p to 90.0p to reflect its higher estimates, but that implied a roughly 30% downside risk.