Proactive Investors - Rolls-Royce Holdings PLC has been given a big share price target hike by Barclays but it also downgraded its recommendation as the market focus is expected to "return to fundamentals" in the near term.
Analysts at the bank hiked their share price target 32% to 145p, but the shares' 66% rerating so far this year has taken them beyond this level already, with the last close at 152.78p.
In their view, the share price re-rating in 2023, which compares to a 6% gain for the FTSE 100, has been driven by four main factors: "macro trading" as China reopens; the substantial free cash flow beat in last month's results at £491mln versus consensus expectations of £64mln; higher expectations on the pace of recovery following the guidance for 2023 widebody (WB) engine flying hours (EFH) at 80-90% of 2019 levels; and short covering by hedge funds, with around 8% short interest now having fallen to nearer 3%.
Barclays now assumes WB EFHs will return to 100% of pre-pandemic levels in 2024, a year earlier than previously expected, rising to 110% in 2025 on heightened passenger demand, generating £250mln more cash receipts than the £1.2bn previously expected.
"With the output of the new CEO’s strategic review expected in H2, commercial optimisation already underway (not limited to terms, enforcement and pricing; with existing LTSA contracts in scope), “deleveraging at pace”, and profit/cash expansion activities, we expect market focus to return to fundamentals near term."
The rating was therefore cut to 'equal weight' from the previous 'overweight'.