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Berenberg lowers target price on Rolls Royce
14th Dec 2020 12:13
(Sharecast News) - Analysts at Berenberg cut their target price on aerospace and defence company Rolls-Royce from 250.0p to 140.op on Monday, citing ongoing headwinds stemming from the Covid-19 pandemic.
Berenberg stated that no one even vaguely observing pandemic news and global air traffic trends in recent months should be surprised that Rolls-Royce tempered its cash guidance and near-term outlook in its trading update on Friday.
Engine flying hours remained subdued in the fourth quarter, at around 70% below 2019 levels due to continued reduced flying globally, feeding through to lower free cash flow guidance and widened net debt of £1.5bn-2.0bn.
However, Berenberg did note that Rolls Royce's medium- and longer-term trajectory remained "positive", in its view, with progress on restructuring continuing as planned and the company reiterating its free cash flow expectations for breakeven in the second half of 2021 and roughly £750.0m in 2022.
"Despite a flatter recovery in the near term and our conservative assumptions, we still see a path to significantly higher cash flow and an entirely delevered balance sheet within three years," said the analysts.
The German bank, which stood by its 'buy' rating on the stock, also noted that its forecasts implied a FCF yield of 10% and 2023 and 13% in 2024.
"The shares may pause after the recent rally, but given improving fundamentals and attractive valuation, combined with positive vaccine and air traffic data over the next six months, we expect the shares push on higher," concluded Berenberg.
Berenberg stated that no one even vaguely observing pandemic news and global air traffic trends in recent months should be surprised that Rolls-Royce tempered its cash guidance and near-term outlook in its trading update on Friday.
Engine flying hours remained subdued in the fourth quarter, at around 70% below 2019 levels due to continued reduced flying globally, feeding through to lower free cash flow guidance and widened net debt of £1.5bn-2.0bn.
However, Berenberg did note that Rolls Royce's medium- and longer-term trajectory remained "positive", in its view, with progress on restructuring continuing as planned and the company reiterating its free cash flow expectations for breakeven in the second half of 2021 and roughly £750.0m in 2022.
"Despite a flatter recovery in the near term and our conservative assumptions, we still see a path to significantly higher cash flow and an entirely delevered balance sheet within three years," said the analysts.
The German bank, which stood by its 'buy' rating on the stock, also noted that its forecasts implied a FCF yield of 10% and 2023 and 13% in 2024.
"The shares may pause after the recent rally, but given improving fundamentals and attractive valuation, combined with positive vaccine and air traffic data over the next six months, we expect the shares push on higher," concluded Berenberg.