JP Morgan upgrades Rolls-Royce to 'overweight'

JP Morgan has upgraded its rating for aerospace engineer Rolls-Royce from 'neutral' to 'overweight' and hiked its target price for the stock from 235p to 400p.

"In April 2018, just after RR published the impact of IFRS 15 on its balance sheet, we argued that RR had far higher LTSA (long-term service agreements) customer advances on its balance sheet than it had previously disclosed," said analyst David Perry.

Perry said that LTSA advances represent cash that will not fully accrue, which has been the primary reason JP Morgan has rated the shares either 'underweight' or 'neutral' since April 2018.

"We now update our thinking on this topic. Whilst we have not changed our view that LTSA advances should be treated as a debt-like item, we now believe that a much higher percentage of RR’s LTSA advances will convert into profit (ie. unencumbered cash that RR can retain and use as its wishes)," Perry said.

He said this was because of "radical moves" made by Rolls-Royce's chief executive Tufan Erginbilgiç, who joined in January 2023, like raising the price the company charges for its LTSAs and a £400-500m cost reduction programme announced last month.

The stock was up 3.4% at 286.2p by 0837 GMT.