Rolls-Royce shares tipped to stage fresh rally

Already up 52% in 2023 so far, Rolls shares have paused for breath, but experts think the company’s own forecasts are too pessimistic. Here’s how high this analyst thinks the shares could go.

Rolls-Royce (LSE:RR.) shares have been backed to go 25% higher as optimism builds in the City over the outlook for the company’s guidance on engine flying hours in 2023.

Bank of America today raised its target price from 175p to 190p, adding that it expects to see positive trends on flying hours in an AGM update on 11 May, and the potential for upside revisions to 2023 expectations by the Paris Air Show in the middle of June.

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Rolls is currently forecasting large engine flying hours (EFH) at 80%-90% of their 2019 pre-Covid level, equivalent to a range of 12.2 million to 13.8 million flying hours.

Bank of America sits at the top end of that range at 90% but has now raised its forecast to 92% amid signs of a “very strong performance” so far in 2023.

This is well ahead of the current City consensus of 84% after the bank’s analysts estimated a range of 97-98% over the Easter period as appetite for travelling remains strong despite the economic headwinds.

The bank added: “We see upside risk on 2023 EFH guidance if Rolls performs as strongly as Easter through summer 2023. We believe Rolls could deliver 2023 EFH above 90% and see Rolls delivering EFH significantly above 90% vs 2019 levels through summer 2023.”

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As a rough rule of thumb, the bank notes that a 1% increase in engine flying hours generates Rolls-Royce about £30-£32 million of additional pre-tax cash inflows.

Management’s current 2023 guidance for free cash flow is between £600 million and £800 million, which compares with 2022’s better-than-expected £505 million and an outflow of £1.5 billion the previous year.

The positive trends come with dividend payments still suspended as Rolls focuses on reducing net debt of £3.3 billion and restoring an investment grade credit rating.

However, its shares have risen by more than 40% since new boss Tufan Erginbilgic presented better-than-expected annual results on 23 February.

He also highlighted a renewed focus on improving the cost base and efficiency to close the performance gap versus peers. More details are due later in the year, including the key points from a strategic review designed to focus investment on the most profitable opportunities.

UBS recently flagged a price target of 200p as it said the catalyst of a new chief executive and a strong and under-appreciated market tailwind coming from China should drive continued upside throughout 2023.

It pointed out that the widebody market is heavily skewed to Asia and especially China, with 51% of 2019 widebody traffic starting or ending on the continent.