UBS upgrades Rolls-Royce to 'buy'

"Even despite the more than 40% share price move since Q4 results Rolls still trades nearly 2pts below its historical yield at circa 9% consensus 2024 estimated free cash flow," the bank said.

"The wide body market is heavily skewed to Asia and especially China, with 51% of 2019 wide body traffic starting or ending in Asia. Chinese weakness alone accounts for more than 40% of the absolute wide body traffic reduction in 2022 versus 2019, so we see China's reopening as an important and underappreciated catalyst that could bring valuations back into line with historical norms."

UBS said the wide body market may be less structurally challenged than consensus believes.

The bank said the new chief executive’s initial presentations to investors have gone well, and it looks forward to his detailed targets presented in the second half.

"However in the meantime we see upside centring on Engine Flying Hours (EFH), where our 2025 Large EFH estimates are more than 20% ahead of consensus and implied targets from Roll's 2022 capital markets day," UBS said.

2023 guidance is the major risk, it added.

"We believe management's 2023 cash flow guidance is a key risk; a miss or downgrade here would reset the reputational uplift achieved so far," it said. "In order to achieve the £600- 800m 2023 free cash flow guidance we believe a large portion of the 2022 inventory build needs to be reversed as well as a further £150m of overdue receivables collected.

"Both are possible, but if supply chain pressures (which are outside of management control) fail to ease it could be at risk."

At 1525 GMT, the shares were up 2.8% at 157.42p.