Proactive Investors - Rolls-Royce Holdings PLC (LON:RR) jumped 3.3% after arch-bear JPMorgan (NYSE:JPM) upgraded the engineer to ‘overweight’ from ‘neutral' with a 400p share price target.
The investment bank said it had rated the FTSE 100-listed engineer at either 'underweight' or 'neutral' since April 2018 reflecting concerns that Rolls had far higher long-term service agreement customer advances (LTSA) on its balance sheet than it had previously disclosed.
JPM said its view was that these LTSA advances represent cash that will not fully accrue to the firm and its shareholders.
But whilst it has not changed its view that LTSA advances should be treated as a debt-like item, JPM now believes that a much higher percentage of the LTSA advances will convert into profit.
This is because of radical moves the new CEO has made in 2023, it explained.
These include raising the price the firm charges for its LTSAs (ie. the rate per “engine flying hour”) and the planned cost reduction of £400-500 million, as announced at the Capital Markets Day on 28 November.
As a result, when the LTSA advances eventually become revenue, the company should make a much better EBITA margin on those sales.
"In other words, a lot more of the customer advances will eventually accrue to RR (and thus its shareholders)," the bank said.
It is the latest bullish commentary from the City community since new chief executive Tufan Erginbilgic joined the firm at the start of the year and pledged to restore the ailing group's fortunes.
Shares are up 188% year-to-date.