Berenberg names Rolls Royce ‘top pick’, operating margins set to grow substantially

Analysts at Berenberg selected Airbus and Rolls Royce as their ‘key picks’ within civilian aerospace, arguing that the deep restructuring such companies had withstood would drive bigger operating margins within three to five years in comparison to pre-pandemic levels.
In the case of Rolls Royce, which they labelled the ‘value play’ in the sector, they said the engineer was “fundamentally” improving its cost structure which would “generate financial results far in excess and of better quality than before. So far, so good.”

Covid-19 had seen Berenberg’s sales and free cash flow forecasts for the sector in 2022 and 2025 drop by 25%/19% and 52%/35%, respectively.

But the analysts retained a positive stance towards the sector given building travel demand and valuations that weren’t stretched.

Indeed, less restricted markets such as China and the US were showing a strong rebound, they said, with the likes of Airbus having pointed to a faster-than-expected ramp-up of the A320 and A220 programmes.

“From a low base, we expect Rolls-Royce will benefit over-proportionally from its fundamental restructuring, although all companies will derive improved business resilience and operational leverage into the upturn.”

Berenberg kept its recommendation for Rolls Royce at ‘buy’ with an unchanged target price of 150.0p.

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