Proactive Investors - Rolls-Royce Holdings PLC (LON:RR.)’s cash flow potential is “significantly mispriced”, with further upside potential following strong engine flying activity in the second half.
That is the view of Morgan Stanley (NYSE:MS), which upgraded the aerospace and engineering firm to 'overweight' from 'equal weight' and set a 275p price target, up from 166p.
The bank views the upcoming Capital Markets Day as key to changing perceptions.
MS explained its aircraft activity tracker suggests engine flying hours (EFH) for Rolls' large-engine fleet, the key driver of cash, is towards the top end (87%) of the 80-90% guidance range for the 10 months.
“We think full-year EFH could meet or exceed 90% if current trends continue, placing upward pressure on already-upgraded free cash flow (FCF) guidance of £0.9-1 billion,” it added.
It now assumes EFH at 90%, driving its FCF forecast to £1.1 billion, around 20% above the guidance mid-point and 15% above consensus.
The broker thinks key to the longer-term investment case is management's more granular description of how it intends to achieve its goals, given the challenging track record.
“Combined with delivery of the strategy over the medium term, we see a clear path to a progressive re-rating of the shares,” it added.