After triple-digit gains is there still fuel in the Rolls-Royce share price?

Rolls-Royce’s share price has flown high this year as a return in international travel bolsters demand for jet engine maintenance and repairs. A new repair hub in China could add to these revenues. However, Rolls-Royce’s share price is now flying near its consensus price targets. Some analysts remain bullish on the stock, chief among those UBS, who have modelled a scenario where the stock hits 600p.

• Rolls-Royce's share price is up 136% this year as demand for civil aviation returns.
• New China joint venture repair hub to open in 2026.
• UBS has a 350p price target on the stock, with one scenario targeting 600p.

Having started 2023 at below 100p a share, the Rolls-Royce [RR.L] share price has rocketed 136% this year to close Friday at 220.4p.

The performance is a far cry from January when new CEO Tufan Erginbilgic described the company as a “burning platform” and said that it had underperformed “every key competitor out there”.

Powering the gains has been the promise of Erginbilgic’s turnaround strategy and a return in demand for Rolls-Royce’s business of maintaining and repairing jet engines. A new repair hub in China could push revenues in this area further when it goes online in the next few years.

Repair hub in China

Rolls-Royce broke ground on Beijing Aero Engine Services Company Limited (BAESL) in late August. The joint venture with Air China [0753.HK] will provide a maintenance, repair and overhaul hub across from Beijing Capital International Airport. The new facility covers 80,000 square metres and is expected to open in 2026.

China is an important part in Rolls-Royce’s supply chain, and is its third-largest single country market. In January, there were 600 Rolls-Royce Trent engines in China, representing 50% of widebody engines in China — a higher market share than in either the UK or the US. At the time Aviation Weekly predicted that total maintenance demand for the engine would be £1.6bn by 2027.

Civil aviation revenue up 28% in H1

Keeping planes in the air through maintenance and repair is a big part of Rolls-Royce’s business, with civil aviation sales up 38% to £3.3bn in the first half (H1) of 2023. Underlying operating profits came in at £405m, reversing a £79m loss from the same period last year, while profit margins were 12.4%.

The rebound in profits comes as demand for international air travel returns from the dog days of the pandemic. The more planes in the sky, the more Rolls-Royce earns through repairs and maintenance.

Improved operational performance is also part of Rolls-Royce’s transformation strategy as it seeks to become a more efficient operation.

When it comes to jet engine manufacture, Rolls-Royce claims that it has a circular economy that provides benefits for customers and the environment. Instead of manufacturing an engine from raw materials and then disposing of them at the end of operational life, Rolls-Royce says it only replaces what is necessary.

“We give all our products second, third and even fourth chances by overhauling them,” said Marc Goldschmidt, Vice President of Remanufacturing & Overhaul Technologies.

Goldschmidt added that an entire engine can be “disassembled into its individual parts, cleaned all around… each piece is checked for damage or wear and replaced with brand-new parts only if necessary”.

Not having to manufacture individual engines is good for sustainability but also good for Rolls-Royce’s maintenance business.

Rolls-Royce share price forecasts

After Roll-Royce’s jet-fuelled share price rise, is there any more upside left in the stock? A 230p 12-month median price target suggests a 4.4% upside on Friday’s close.

One of the most bullish targets comes from UBS, which upped its price target from 200p to 350p in August. In one scenario, UBS sees Rolls Royce shares hitting 600p, although another scenario sees them slumping to 100p.

“We believe that 2023 guidance looks conservative, that Rolls-Royce could achieve £2bn of [free cash flow] as soon as 2024 and £2.8bn of underlying [free cash flow] in 2026,” UBS said.

JP Morgan’s 235p price target suggests a slight upside on Friday’s close, as does Barclays’ 239p target.

Rolls-Royce delivered a whopping £673m in underlying profits in H1, up from £125m and more than the entirety of 2022.

This year it is targeting operating profits of between £1.2bn and £1.4bn, with free cash flow of between £0.9bn and £1bn — figures regarded as ‘conservative’ by UBS. That figure is based on engine flight hours at 80% and 90% of 2019 — i.e., pre-pandemic — levels, and between 1,200 and 1,300 shop visits for repairs and maintenance.

How Rolls-Royce gets on hitting these targets will go a long way towards determining whether it can maintain this year’s furious share price gains.