Rolls-Royce upgrade highlights a path to 2000p
The shares have just topped £10 but is there scope for a much richer Rolls-Royce valuation? A City bank thinks so after upgrading the engine giant today.
14th August 2025 13:27
The optimism of Rolls-Royce Holdings (LSE:RR.) that it could become the UK’s most valuable company received support today after a City bank outlined a “credible” scenario where shares hit £20.
The upside case of analysts at UBS is based on the delivery of £5.8 billion of free cash flow in 2028, compared with the company’s current guidance between £4.2 billion and £4.5 billion.
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The higher valuation is also built on the assumption that investors will increasingly move toward valuing Rolls-Royce against GE, given the more comparable ownership structure.
UBS’s base case is that shares are worth 1,375p, which compares with today’s level of 1,104.5p following a fresh bounce for shares since beat-and-raise interim results on 31 July.
The bank first recommended buying the shares in March 2023, when they were at 153p, before making six upgrades to its price target to stand at 1,075p earlier in July.
Today’s upgraded price target of 1,375p places Rolls at a 10% discount to GE and a 25% premium to Safran SA (EURONEXT:SAF). It would also lift the company’s valuation to £115 billion, which based on today’s market prices would make Rolls the fourth-largest stock in the FTSE 100.
A price of £20 is equivalent to £167 billion, slightly above the current valuation of HSBC Holdings (LSE:HSBA) and £10 billion short of FTSE 100 leader AstraZeneca (LSE:AZN).
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Rolls-Royce chief executive Tufan Erginbilgic, who has overseen a ten-fold increase in share price since taking over in January 2023. told the BBC this week that the group has the “potential” to become the UK’s highest-valued company.
His optimism is built around the company’s role in powering the data centres behind the adoption of artificial intelligence (AI).
Erginbilgic estimates that the world will need 400 small modular nuclear reactors (SMRs) by 2050, a market he wants and expects Rolls to dominate.
The company has already signed a deal for six SMRs in the Czech Republic and is developing three for the UK.
Erginbilgic said: “There is no private company in the world with the nuclear capability we have. If we are not market leader globally, we did something wrong.”
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In the recent half-year results, Rolls said it expects the SMR business will be profitable and free cash flow positive by 2030.
It added: “We continue to see significant international interest in Rolls-Royce SMRs, including in Sweden where we have been shortlisted as one of two potential SMR providers by Vattenfall.”
Last month’s results, which included a 43% beat on half-year earnings and improved guidance for 2025, further derisked progress towards 2028 targets. These are currently for underlying operating profit of £3.6 billion-£3.9 billion and free cash flow of £4.2 billion-£4.5 billion.
In today’s note, UBS lifted its base case estimate for 2028 free cash flow to £5.4 billion.
The upgrade reflected the bank’s own above-management pricing expectations and above-guidance margin assumptions in civil aerospace and power systems, where it sees further opportunity for turnaround benefits to be realised.
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It wrote: “Our new £13.75 price target puts Rolls on the same free cash flow yield valuation as Safran in 2028, which we judge as appropriate as we believe Rolls-Royce can continue to close the execution risk discount in the share price.
“However, in an upside scenario of £5.8 billion in 2028 free cash flow, and Rolls’ growing comparison to GE over Safran given its ownership structure, we see £20 fair value as credible.”
Should Rolls disappoint and deliver the low end of the 2028 free cash flow guidance range, the bank sees a £9 fair value.
Rolls is due to make an interim payment of 4.5p a share on 18 September, having recently returned to the dividend ranks with a full-year distribution of 6p a share.
The group is part way through a £1 billion share buyback programme, meaning the amount set to be returned to shareholders in 2025 will total £1.9 billion.
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