Rolls Royce's 'bold' and 'refreshing' approach impresses Kepler

Following its capital markets day last week, analysts at Kepler took a fresh look at British aerospace and power systems giant Rolls Royce on Monday.

Kepler felt that Rolls Royce's mid-term free cash flow targets of "at least" £1.8bn to £1.9bn were quite "bold", far surpassing the broker's prior best assumptions of £1.5-1.6bn for 2022-2023, leading to a "tangible impact" on its valuation of the firm.

However, after challenging the firm directly at the CMD, the broker believed Rolls Royce coul meet its revised expectations.

"We challenged them and concluded the targets are ambitious, but credible," said Kepler.

Underlying assumptions such as reducing the OE cash deficit - thanks to improved execution on new engines such as the Trent XWB and rent 7000 - and steady increase in flying hours, both stand.

Its £400m savings target from its restructuring was also deemed achievable, albeit at the expense of 4,600 jobs, hailing management's "refreshing" resolve, clear-sightedness and pragmatic approach, all of which bolstered their credibility.

Kepler also pointed to Rolls Royce's imminent disposal of its commercial marine unit as another potential benefit that lay ahead, with the CMD having also provided proof that its Power Systems arm has room to grow further, while Defence should benefit from a better environment in the US.

All told, Kepler increased its target price on Rolls Royce from 815p to 975p and upped its rating from 'reduce' to 'hold'.