Rolls-Royce spells out cash flow confidence
ROLLS ROYCE (RR.) 919.2p
Gain to date: 9.9%
Original entry point: Buy at 836.6p, 10 May 2018
Shares in Rolls-Royce (RR.) have hit the £10.00 target we suggested in last month’s original Great Ideas – they actually touched that level during intra-day trading on 15 June, before closing at 981.76p.
The stock has eased back a bit since but the wave of investor buying shows that the wider market is coming round to our value opportunity way of thinking. What’s changed is the company’s confidence that it can beat previous operating performance targets, particularly on free cash flow.
Management believe the company could now exceed £1bn of free cash flow by 2020. Forecast free cash flow this year is pitched at £382m. Berenberg analysts predict the business could generate nearly £1.9bn by 2023.
Forecasting performance this far out involves a fair chunk of assumption. But there is a much clearer pathway for performance improvement thanks to Rolls-Royce’s streamlining plans that will involve 4,600 job cuts and simply running the business better.