‘Top pick’ Rolls-Royce backed for 23% upside

Rolls-Royce employees with a Trent XWB engine. Credit: Rolls-Royce via Flickr.

The multiple growth engines of Rolls-Royce Holdings (LSE:RR.) have been backed to continue firing after a City bank this week upped its earnings estimates alongside a new price target of 1,900p.

Berenberg’s ongoing support for Rolls as its top pick of the civil aerospace sector signals a further 23% upside for shares, having seen them put on 29% so far this year to 1,549p.

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The bank said the current valuation was still attractive on a free cash flow yield basis, which at a projected 4.4% in 2028 is 80 basis points cheaper than peers Safran SA (EURONEXT:SAF) and MTU Aero Engines AG (XETRA:MTX).

It said last month’s beat-and-raise interim results demonstrated “material, broad-based profit growth” in each of Rolls’ three end-markets of civil aerospace, defence and power systems. 

The bank has responded by raising its earnings per share estimate (EPS) for this year by 10% to an underlying 42.4p and by 15% to 51p and 59.6p respectively for the following two years.

The total dividend for 2026 is now seen at 14.61p a share, which includes the 6p already declared for payment on 18 September, before an increase to 22.06p by 2028. 

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The drivers of Berenberg’s new earnings estimates are double-digit upgrades to operating profit in each division, including a 29% uplift to its 2026 defence forecast and 15% upgrades to each of its civil aerospace and power systems forecasts. 

Berenberg said the core civil aerospace business continued to outperform after noting that engine flying hour growth had exceeded European peers every month this year, including by 5.7% on an adjusted basis in July.

Growth continues to be driven by the three newer Trent engines - the Trent XWB (pictured), Trent 1000, and Trent 7000 - as the higher jet fuel price following the US-Iran conflict has led airlines to prioritise the utilisation of more efficient engines.

Berenberg said: “This well-diversified growth offers an attractive runway for further civil aftermarket outperformance, and stands in contrast to the more concentrated growth of its European peers.”

It added that Power Systems was the standout division in the recent half-year results, having delivered 69% year-on-year operating profit growth.

Medium-term prospects for the division have been boosted by significantly faster growth in prime power gas engine sales for data centres, versus demand for back-up power.

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The defence division also surprised positively after the operating profit margin increased by 560 basis points to 21% in the six-month period.

Berenberg now sees Rolls delivering 2026 group operating profit of £4.85 billion and free cash flow of £4.08 billion, which compares with the company’s guidance of between £4.7 billion and £4.9 billion and £3.8 billion-£4 billion respectively.

It added: “We reiterate Rolls-Royce as our top pick given its strength in engine depth and the company’s diversification across buoyant defence and data centre end-markets.”