Broker snap: Investec upgrades Rolls-Royce on profit and payout potential

14th Jun 2013 09:19

Investec has upgraded power-systems giant Rolls-Royce from 'add' to 'buy', saying that profitability is on an upwards trajectory and higher payouts for shareholders could be on the cards.Investec highlighted the momentum in Civil Aerospace where the backlog is around £45bn. The broker said that Trent engine production is accelerating and the maiden test flight of Airbus' A350 on Friday passes a "major risk milestone".Meanwhile, the broker highlighted that profit is embedded within maturing long-term service agreements of Trent engines which will have an increasingly positive impact on the bottom line - "a dynamic that we believe is being underestimated by many commentators".With cost savings/efficiencies being made, Investec forecasts Rolls-Royce to have net cash of around £2.0bn by 2014 and annual net cash inflows of over £1.0bn. "Increased shareholder returns must be in prospect," the broker said.Investec has raised its 2013, 2014 and 2015 earnings-per-share forecasts by 1.0%, 4.0% and 10%, respectively, mainly due to increased growth and margins expectations in Civil Aerospace.The broker has hiked its target price for the stock from 1,125 to 1,350p."Rolls-Royce?s long-term and highly visible growth story is understood by the market. However, we argue its power, in terms of earnings potential, is underappreciated and only just coming to light," Investec said."The business is characterised by long product cycles and we believe that a combination of strong growth in volumes (engine production and aftermarket) with maturing TotalCare® service contracts and cost reductions will increasingly drive the group?s financial performance to consistent year-on-year highs for the foreseeable future."