Proactive Investors - Rolls-Royce Holdings PLC (LON:RR) has been the talk of the town this year.
Since Tufan Erginbilgic took the helm early on in January, things could not have gone better for the FTSE 100-listed manufacturer, with the new boss’s large-scale turnaround plan working wonders in reigniting enthusiasm for the stock.
Indeed, Rolls-Royce is honing in on share price gains of 200% for the year.
What’s more, general consensus is that Rolls-Royce will keep it up in 2024, with the manufacturer having been showered in upgrades by brokers over the past month.
Flying boom
The latest bout of optimism for Erginbilgic’s firm came from Bank of America (NYSE:BAC) in mid-December, as analysts bumped Rolls-Royce’s share price targets from 400p to 420p.
Anticipating the resumption of dividend payments next year, analysts from the bank said 2024 should finally see long-haul flying hours return to pre-pandemic levels.
Such a rebound would provide further fuel for Rolls-Royce, given the amount received from airlines running its engines is based on how long these are flown for.
Rolls-Royce engine flying times for 2023 are expected to sit at just 87% of 2019 levels, for reference.
Such positive sentiment towards Rolls-Royce is widely shared, with rating agency Fitch having raised its long term credit status from BBB to BB+ in early December on similar anticipations.
“Rolls-Royce's established prime contractor status for wide-body engine manufactur[ing] means it will continue to benefit from the recovery of wide-body aircraft production,” Fitch said.
Naturally then, such an uptick in fortunes for the long-haul sector can only spell good news for Rolls-Royce.
Operational reform
However, it isn’t just external factors which have analysts rooting for Rolls-Royce.
Internal improvements in Rolls-Royce’s civil aerospace wing have also prompted excitement.
Rolls-Royce itself has guided towards a £250 million boost to full-year profit from more favourable contract terms with those operating its engines.
This would come as a direct result of the company taking a harder line negotiating deals with customers and, alongside a score of other operational improvements, has led Rolls-Royce to target as much as £1.4 billion and £1 billion in pre-tax earnings and free cash flow respectively for this full year.
These operational improvements led Citi analysts to join the chorus of brokers singing Rolls-Royce’s praises in December.
Analysts from the bank hiked their target for the manufacturer’s share price to 431p, pointing to savings from job cuts announced by Rolls-Royce in October.
Increasing numbers of engine overhauls, growing airline fleets and the resultant uptick in spending on service agreements all offer Rolls-Royce a sustainable source of cash over the long-term, the bank said.
A buy rating from Deutsche Bank (ETR:DBKGn) echoed the optimism surrounding Rolls-Royce, but also shone a light on the reality of the sector the business is in.
Defence
Indeed, it’s not just Rolls-Royce’s exposure to the aviation industry which analysts are anticipating will power gains next year.
Rolls-Royce, of course, is a major player in the defence landscape, developing the likes of power units for jets and nuclear submarines alike.
Given the now near-two year large-scale war in Ukraine and recent outbreak of conflict between Israel and Hamas in the middle east, JP Morgan analysts said defence spending could well continue on an upward trajectory for “five to ten years”.
“It is hard to escape the view that geopolitical tensions are [that] high that Europe is now seeing a reverse of the around 30 years of stability,” the bank said.
Undeniably, Rolls-Royce stands to gain from any uptick in defence spending, with Fitch also pointing to such prospects in its own upgrade.
For Deutsche, this constituted a share price target upgrade from 310p to 400p.
Own ambitious targets
Of course, something had to have prompted such a flurry of upgrades for Rolls-Royce in December.
Despite clear improvement throughout the year, the final piece in the puzzle was needed for onlookers to really believe Erginbilgic had enforced fundamental charge after the engine maker was struck down by the grounding of flights during the pandemic.
This came in late November, as Rolls-Royce unveiled a host of ambitious medium-term targets during its capital markets day.
Under these, Rolls-Royce will target operating profit of between £2.5 and £2.8 billion and free cash flow of at least £2.8 billion by 2027.
Some £1 billion to £1.5 billion is expected to come through disposals, which will be made “at the right time and at the right price,” according to the company.
Rolls-Royce is “at a pivotal point in its history”, Erganbilgic said at the time, adding such aims of quadrupling profits were both "compelling and achievable”.
Indeed, steady share price gains over the year shows that investors agree that the targets are compelling.
What remains in question now is whether such targets are ultimately achievable.