The Ratings Game: Supply-chain issues will weigh on Airbus and Boeing deliveries this year. Rolls-Royce will benefit, says Deutsche Bank

Daily Trade

As supply chain issues linger, airlines will be relying on servicing of existing fleets to keep up with continued customer demand in 2023, and Rolls-Royce Holdings PLC is well placed to tap into that.

That’s according to Deutsche Bank, which upgraded Rolls-Royce
RR,
+2.01%

to buy from hold on Thursday, lifting its target price to 136 pence per share from 90 pence.

The bank has “gained greater clarity regarding Rolls-Royce’s civil aerospace aftermarket recovery,” adding that China’s economic reopening and a global travel resurgence have provided “increased confidence in a marked rise in A330 MRO activity,” said analyst Christopher Menard in a note.

The Airbus
AIR,
+0.58%

A330 is one of the most widely used passenger aircraft, while MRO refers to aircraft maintenance, repair, and overhaul.

Menard said that 2023 passenger traffic is set to rebound faster than expected, and airlines “will need extra capacity to meet that demand, but persistent supply chain issues should continue to be a drag on Airbus
AIR,
+0.58%

and Boeing
BA,
+0.33%

deliveries in 2023, compromising an already challenging ramp-up.”

Those airlines will instead be looking to support existing fleets through servicing via engine makers like Rolls-Royce. Deutsche Bank confirmed buy ratings on Safran SA
SAF,
+1.29%

and MTU Aero Engines AG
MTX,
+1.16%

in the same sector.

Deutsche Bank downgraded Airbus to hold from buy, cutting delivery forecasts for 2023-2025 by 5% and estimates by 4% to 7%. “The company’s lackluster 2022 delivery performance rebases our 2023-2025 delivery sequence, and there is no possibility that Airbus will quickly catch up on the 40-unit delivery shortfall seen in 2022,” said Menard.

He added that Airbus needs to “rebase delivery expectations once and for all in order to clear current investor concern; and the sooner the better, as we believe the story continues to offer solid fundamentals.” Their price target was cut to €120 from €130 per share.

While Rolls-Royce’s defense and power systems units have seen improved performance for a while, that hasn’t been enough to compensative for shortfalls in aerospace profit and free cash flow.

“The current, more positive environment, coupled with the appointment of a new CEO, should mark 2023 as a key milestone in the company’s transformation,” said Menard. Rolls-Royce appointed Tufan Erginbilgic as CEO last summer.

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