Rolls-Royce boosted by UBS upgrade to 'buy'

Aerospace and defence group Rolls-Royce got a boost on Wednesday as UBS upgraded the stock to ‘buy’ from ‘neutral’ and lifted the price target to 835p from 800p.

The bank said the shares were “unloved”, with a high level of scepticism about management's ability to deliver adequate levels of free cash flow in 2018-20.

UBS estimates cash generation is close to £850m in 2019E and £1.1bn in 2020E, including £640-680m from the non-Civil Aerospace activities. It said investors are ascribing little value to cash improvement in 2019/2020.

“Over 2017, we think investors will gain more comfort on management's ‘grip’ on the business. 2016 was the first year without warnings since February 2014, and the 2016 outlook was raised slightly in Jan 2017. The FY16 results are due on 14 Feb, with potentially further cost-reduction announced.”

UBS said its industrials and commodities teams are becoming more constructive on the short-cycle industrial end markets, and the bank retains its positive stance on the defence spending outlook in the US and the UK.

The bank said RR’s non-Civil Aerospace businesses could surprise positively in 2018 and provide more confidence to the story. It noted Rolls has around 33% of its group sales exposed to early/short-cycle industries where it is seeing improving trends, and 16% exposed to defence spending, which is at the beginning of an upcycle.

At 1000 GMT, the shares were up 1.6% to 678p.