Proactive Investors - Rolls-Royce Holdings PLC (LON:RR) shares are eyeing a further jet-fuelled increase in value if the engine maker can hit high-end cash flow targets, Citigroup analysts suggest.
FTSE 100-listed Roll-Royce’s 2027 free cash flow target of between £2.8 billion and £3.1 billion looks “much more credible” following results last week, the bank wrote in a note.
At £3.1 billion by 2027, on compound annual growth of 5% and 9% weighted average costs, the targeted free cash flow could imply a current fair value of as high as 777p, analysts said.
However, Rolls-Royce’s ability to meet either end of its targeted free cash flow range would equate to a widely different scenario for the shares, according to the bank.
Lower annual growth of 3% on free cash flow of £2.8 billion would reflect a current fair value of 468p, Citi forecast.
Given Rolls-Royce’s near five-fold increase in value since chief executive Tufan Erginbilgic took charge early last year, gains would add to rapid growth in the shares seen recently.
This has been fuelled by the company’s bid to turn fortunes around under Erginbilgic after the pandemic added to pressure caused by existing issues at the engine maker.
Rolls-Royce’s results last week showed a 74% rise in underlying profit to £1.1 billion for the six months to June, on the back of an 18% increase in revenue to £8.2 billion.
Aided by cost-cutting, underlying operating margins increased to 14.0% from 9.6%, with the company guiding to free cash of £2.1 billion to £2.2 billion for the full year.
Citi added annual growth of 3% to 5% was a “reasonable range,” highlighting its own 555p share price target at a 19% premium to Friday’s close.