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Broker tips: Rolls-Royce, Vodafone

By Alexander Bueso

Date: Thursday 27 Jul 2023

Broker tips: Rolls-Royce, Vodafone

(Sharecast News) - Bank of America Merrill Lynch hiked its price target on engine maker Rolls-Royce on Thursday to 260p from 190p after results a day earlier.
After three years of depressed earnings the widebody recovery is on track, strongly supporting Rolls free cash flow generation," the bank said.

"As FCF improves we believe that the Rolls balance sheet becomes less of a concern, with metrics moving in the right direction for a rating upgrade through 2024."

BofA ML said it sees "significant" room for cost-cutting in Power Systems, as well as upside in Defence and Civil Aero.

"With better cost management and flight hour tailwinds we see more than 900 basis points of Civil margin expansion through 2026 (versus 2022) supporting circa £1.9bn of free cash flow in 2026.

"As a result, we raise our target free cash flow multiple from 10x to 13x and our price objective moves to 260p."

Analysts at Citi reiterated their 'neutral' recommendation on shares of Vodafone, labelling the telecoms operator's first quarter results as "decent".

Nonetheless, the company was not yet "out of the woods", they said.

According to the analysts, the Key Performance Indicators for the group were pointing in the wrong direction.

Furthermore, in Germany the effects of Nebenkostenprivileg would begin to be felt by the end of the fiscal year and into FY2025.

"lthough 1Q and 2Q improvementsmay be cheered more due to low expectations rather than underlying improvement, it is likely to be enough to further support the shares," they said in a research report sent to clients.

Indeed, risks around the 2025 fiscal year remained, they added.


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