Broker snap: Rolls-Royce not worthy of premium rating

27th Jan 2010 13:21

UBS is raising its price target for engine designer Rolls-Royce but maintaining its 'sell's stance, noting that the company already trades at a significant premium to its civil aerospace sector peers.'For a company that in our view; faces a weak cash flow outlook for both 2010 and 2011; brings a degree of risk due to more aggressive accounting policies; and has earnings expectations which we believe are too high, we believe a premium rating can not be justified - hence our Sell rating,' says UBS analyst Avi Hoddes.The broker is raising its earnings per share (EPS) estimates for Rolls-Royce to take into account a healthier outlook for the industry. The 2009 EPS estimate has been ramped up by 15%, while 2010 and 2011 see their EPS forecasts increased by 135 and 11% respectively. |The earnings upgrades have prompted a change in the price target from 280p to 360p.UBS is expecting the company to 'guide to a weak cash flow outlook for 2010 when it reports its results on 11 February,' which could seriously knock the share price. 'On the positive front, it is possible that the benefit from aftermarket growth and £/US$ currency benefit could come through quicker than expected,' UBS concedes.