Broker snap: Jefferies ups target for Rolls-Royce on TotalCare optimism

24th Sep 2013 09:20

Power systems giant Rolls-Royce was a high riser on the FTSE 100 on Tuesday morning after Jefferies raised its target price for the stock from 1,250p to 1,400p and kept a 'buy' rating as it expressed optimism with 'TotalCare'.Jefferies said that TotalCare - Rolls-Royce's maintenance and repair services activities in the Civil Aerospace division - was blamed for a greater-than-normal cash outflow in the group's first half, though in fact Defence and perhaps Marine were actually the contributors."That saw the scale of engine losses significantly exaggerated, in our view," the broker said."We believe the coming growth in TotalCare revenues - we estimate them at around £2bn in FY13 - was also neglected. Such revenues could broadly double in five years and treble in nine years, in our view. We believe TotalCare revenues to be highly profitable."Jefferies expects TotalCare revenues to generate around £400-500m of cash flows in 2013. These are partly consumed by engine losses (£100-200m) and by a current mismatch between revenues and overhaul spend (£100-200m). The broker reckons that the latter is only a temporary timing difference and reckons that TotalCare-related cash flows will "materially improve" from 2015/2016 onwards in response to strong revenue growth."As time passes, we have deduced and discovered more about TotalCare to a point where we see it as an opportunity rather than as a risk or threat," Jefferies said."TotalCare offers Rolls-Royce a different way of going to market, in our view. Some engines may be sold at losses initially, but perhaps the compensation is greater aftermarket revenues, in our view. In short, we believe higher engine deliveries combined with unit cost reductions will eventually see engine losses reduced and engines currently sold at or around breakeven become profitable."The stock was up 1.52% at 1,132p by 10:12 on Tuesday.BC