Rolls-Royce share price News | The Twelfth Magpie

Contracts galore! Should I buy surging Rolls-Royce shares for growth?

Suraj Radhakrishnan — Mon, 21 Nov 2022 15:30:00 +0000

Since mid-October, Rolls-Royce (LSE:RR) shares have jumped over 30%. I have been tracking the beaten-down engineering giant for signs of a trend reversal. The aviation industry is recovering steadily, which has triggered a host of new contracts for the firm. Some of its more recent ventures are also witnessing steady growth.

Here, I will look at the finances, share price, and recent developments at the firm to judge if the shares hold enough value to earn a place on my growth portfolio moving forward.

Return of flight care contracts

A vast majority of Rolls-Royce’s pre-pandemic revenue came from flight engine upkeep contracts. With flights grounded for over 24 months, most TotalCare packages were cancelled. But this year, the firm has seen a marked increase in new service agreements.

Last week, the FTSE 100 company signed a five-year TotalCare contract with China Eastern Airlines for 10 Trent 700 engines. The firm also secured similar contracts with Malaysian Aviation Group and Air China in September. While this is still not close to pre-pandemic numbers, I see it as a definitive sign of a rebounding airline industry.

In a recent update, Rolls-Royce stated that, as of 30 October, large engine flying hours hit 65% of 2019 levels and rose 36% since October 2021. If this recovery is sustained, the company expects revenue growth next year through these upkeep contracts.

Power and defence

The energy crisis has accelerated renewables development. Rolls-Royce has been identified as a key provider of nuclear power in the UK and is also helping industries transition to better electricity storage units.

The firm’s line of mtu engines, power packs, and generators is seeing wide adoption across industries worldwide. Rolls-Royce recently secured a contract to power the largest supercomputer facility in the Middle East. The company has also provided 200 mtu generators to become the UK’s leading provider of critical power solutions. The 3.5 gigawatts output powers data centres, telecom, and healthcare industries in the UK.

On the defence side, Rolls-Royce has signed a deal with the U.S. military valued at US$1.8bn to service engines for U.S. Navy aircrafts. Rolls-Royce will also provide 500 mtu engines for the UK’s Boxer armoured vehicle and 16 gensets for the German navy.

Concerns and verdict

All these positives make me bullish on the Rolls-Royce share price at 84p, given that its pre-pandemic high was close to 350p. But I have to look at how the company can navigate some of the concerns as well.

Rolls-Royce acquired significant debt during the pandemic period. However, the board managed to complete the sale of its ITP Aero division to help the firm repay a £2bn floating rate loan by 2025. The remaining £3bn debt will continue to eat into future revenue but the recent positive development is encouraging.

Sky-high energy prices could increase flight ticket prices, further pushing back recovery. And this could prove to be a strong blow for the firm. I will be tracking this over the coming months closely.

But I do see value in Rolls-Royce shares at the moment as all its target markets are recovering. I think it has the order book and market share to navigate some turbulence. Barring any huge negative developments, I would consider a £10,000 lump sum investment in Rolls-Royce shares when I expand my portfolio next.

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Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

At 69p, are Rolls-Royce shares too cheap to miss?

Suraj Radhakrishnan — Mon, 10 Oct 2022 15:50:00 +0000

After a torrid pandemic period, many analysts, including myself, expected Rolls-Royce (LSE:RR) shares to recover in 2022. However, the engineering firm’s stock is down over 52% in the last 12 months and is amongst the five worst performing FTSE 100 shares for this period.

I have been looking for a quality business to invest £1,000 in before 2023. My criteria are that it must be cheap, offer value, and operate in exciting areas.

While Rolls-Royce shares look really cheap on paper at current levels, is it the best option for my growth portfolio at the moment? Let’s find out.

The positives

Rolls-Royce’s balance sheet is improving. Increasing orders from its civil aviation wing for aircraft engines and maintenance is a positive. While international air travel hasn’t recovered as expected, it is still 52% higher than 2021 levels. This could benefit Rolls-Royce shares over the coming months, especially since the pandemic’s fear has died substantially.

The growth of Rolls-Royce’s new power systems wing is promising. Defence contracts are improving too, fuelled by the Russian invasion of Ukraine.

The company will play a vital role in the US Department of Defense nuclear microreactor program alongside BWX Technologies. This promising development comes after a long line of orders for Rolls-Royce’s nuclear reactor program, including from the UK government.

However, the big question for me here is how will the UK’s struggling economy affect this recovery?

Will the Rolls-Royce share price stagnate?

Firstly, it is not just one stock that is suffering. The Footsie is down 8.5% in the last six months, pointing to a market-wide pullback. However, Rolls-Royce’s struggles are unique in some ways. The blue-chip firm operates in tough sectors like defence, aviation, and energy. It is constantly among the highest-traded stocks in the UK. Despite these factors, investors are exiting fast.

One of the perks of investing when the market is down is that stable businesses often rebound quickly, giving smart investors solid returns in a shorter span. However, I do not see this happening with Rolls-Royce shares. Mounting debt has weighed this business down this year. Net debt currently stands at £5.14bn.

While the £1.4bn sale of ITP Aero will be factored in at the end of this year, debt will still be a concern in 2023. The business returned to profitability in 2021. But due to the high R&D budget, interest payments will continue to chip away at profits for the foreseeable future.

The order book of £6.5bn will help maintain a positive cash flow moving forward. But I have to factor in spendings too. Increasing pressure on renewable power sources means all nuclear projects will be accelerated. This means higher wages and faster turnarounds which will deplete its profits.

New Prime Minister Liz Truss has also stressed the importance of the UK boosting its own oil and gas reserves. Right now, the energy sector looks fractured with the push for renewable energy proving too expensive. How the new leadership chooses to address this will vastly impact industry profits going forward, especially for firms like Rolls-Royce that have invested heavily in renewables.

All this adds to the uncertainty around Rolls-Royce shares which is why I am choosing to keep away at the moment, despite the latest crash.

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Should I snap up Rolls-Royce shares while they are still below £1?

Suraj Radhakrishnan — Mon, 05 Sep 2022 13:40:17 +0000

No company encapsulates the devastating impact of the pandemic on businesses as well as Rolls-Royce (LSE:RR). The absence of civil aviation for nearly two years wreaked havoc on the engineering firm. And its stock has been struggling since. But despite the decline, I think Rolls-Royce shares still hold incredible value.

While I am willing to overlook a few holes in its balance sheet, I also know that many strong businesses have collapsed during tough economic periods. Here, I will look at the Rolls-Royce share price in detail to judge if the business is worth investing in before 2023.

Can aviation boost Rolls-Royce shares?

Currently, the UK economy is under swirling clouds of uncertainty. The country is grappling with a huge energy crisis. In fact, reports show that the UK’s energy crisis is the worst in Western Europe. All of this has impacted how investors are looking at the market.

This also has put an immense strain on businesses, including Rolls-Royce. The firm’s return to profitability in 2021 was a positive marker for investors. However, this already seems to have slowed down over 50% in the first half (H1) of 2022 with just £125m in profits.

The silver lining here is the return of air traffic. Rolls-Royce has already seen a spate of deals for its profitable engine upkeep business. Just today, a new venture with Air China to overhaul and maintain its sizable fleet was signed.

While the latest crash in the Rolls-Royce share price is triggered by the health of the UK economy as a whole, the engineering firm is slowly looking to reverse recent fortunes.

Future focussed

The big reason why I am still slightly bullish on Rolls-Royce is because of the smart restructure. And the areas it’s exploring now have me buzzing.

Energy and defence are a huge focus for the firm going forward. The invasion of Ukraine has derailed the energy sector and has countries in the region scrambling to improve defences. This has boosted both industries tremendously.

And Rolls-Royce is set to play a big role in both. The firm’s small nuclear reactor project was given the green light by the UK government. The power systems division has seen its order book grow by 53% to £2.1bn. The second quarter (Q2) of 2022 especially saw a huge spike in sales.

The other booming area for Rolls-Royce is defence. The company recently signed billion-dollar deals with the US, UK and German militaries. It holds a vast £6.5bn order book, which includes an 11-year contract to support the Adour engine, which powers UK’s Hawk jets.

Concerns and verdict

Despite the large order books, profit margins have been falling. Its booming defence wing saw underlying profits fall 32% to £189m compared with H1 2021. The power systems also took a step back. H1 2021’s positive cash flow of £71m was reversed this year, with the sector bleeding out -£76m in H1 2022.

The board chalked this up to high demand, increasing costs and supply chain challenges. But I think these figures will get worse thanks to rising commodity prices.

There is no denying the intrinsic value of Rolls-Royce shares at 77p. But right now, given the turbulence in the UK, I am waiting for 2022’s full-year reports before investing in Rolls-Royce shares.

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Here are two beaten-down growth stocks I like the look of today

Dylan Hood — Tue, 30 Aug 2022 06:44:00 +0000

2022 has been a year characterised by surging inflation. Caused by supply bottlenecks from Covid-19, ultra-low interest rates, and magnified by the Russia-Ukraine crisis, inflation reached 10.1% in the UK in July. Across the Atlantic, the situation was similar, with prices rising 8.7% year on year in July.

With inflation rising, central banks are hiking interest rates. This is placing big pressure on growth stock valuations, as people pull their money out of speculative assets. At historically low prices, I’m looking for bargain growth stocks that could land me some big returns in the future. Below are two stocks I currently have my eye on.

NIO

NIO (NYSE: NIO) is a Chinese electric vehicle manufacturer. It had a standout year in 2020, when its shares climbed over 1,100%. However in 2022, things haven’t been as easy with the shares falling 40% year-to-date. Over 12 months, the shares are down 47%.

The reason I like the look of this stock is due to its remarkable results. In Q1, the firm saw its year-on-year deliveries rising by 29%, with revenues climbing by 24%. Although NIO is still loss-making, its losses shrank 10% compared with the previous quarter, which is a good sign. In 2021, revenues soared by over 122%!

NIO also boasts some market-leading tech when it comes to battery charging. Its cars feature unique battery swapping technology that can be applied in a matter of minutes. Being the only manufacturer to offer this service, I think the stock is well poised to capture market share.

Rolls-Royce

Rolls-Royce (LSE: RR) is a UK-based civil engineering and defence company. It was hit hard by the pandemic in March 2020 and recorded a hefty £4bn loss for that year. However, recently the firm reported a profit for the first time since then, signalling a strong recovery so far in 2022.

Rolls makes the majority of its money from servicing aeroplane engines. With global travel increasing, I think Rolls could be in a great spot for growth this year. In 2020, just 1.8bn travellers boarded planes. Fast forward to 2022, and it’s predicted that 3.5bn customers will board flights. This should help boost revenues so the group can keep delivering profits.

Rolls is also leading the stride in small-to-medium-sized nuclear reactor technology. It expects to receive clearance to roll out these reactors by 2024 and has already signed contracts with governments around the world to implement them.

The caveat

I think that both of these companies exhibit some great fundamentals. However, no matter how these firms perform over the coming year, rising inflation could continue to plague their stock prices. If this is the case, then they could fall even lower – regardless of their encouraging results. However, adopting a long-term view, I think these stocks could be great additions to my portfolio at their current prices.

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Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

3 reasons why Rolls-Royce shares could be a big winner in 2023

Suraj Radhakrishnan — Tue, 16 Aug 2022 16:00:27 +0000

The steady decline of the Rolls-Royce share price over the last two years is well documented. The engineering firm’s shares have fallen over 70% since mid-2020 and 20.5% in the last 12 months of trading. But, things are finally looking up. Just this month, three crucial updates have firmly put Rolls-Royce shares on the radar of many investors, including me.

Here’s what I think these developments mean and why I think a resurgence is on the cards.

Significance of recent results

The first big factor that could affect Rolls-Royce’s shares is a return to profitability. And the recently released first-half (H1) results show improvements that strengthen my belief that a rebound is highly likely.

Free cash outflow for Rolls-Royce across H1 2022 went down by £1.1bn, predominantly due to increased flying hours in civil aviation. This shows me that Rolls-Royce shares benefit a lot if the aviation industry rebounds fully in 2023.

And I think this development could propel the firm to profitability in 2023. Boeing, a global leader in aviation, recently stated that the airline industry will reach 2019 levels by the end of 2023 or early 2024. In fact, April 2022 saw a 78.7% jump in traffic compared to the same period in 2021. And this trend has remained consistent across this year.

Debt has been a sore subject for the Rolls-Royce shareholders. But the approval of the €1.8bn sale of its ITP Aero business, announced last week, is the next big reason why I think Rolls-Royce shares could explode. The board announced that proceeds will be used to plug its £5bn debt, which could significantly bolster investor sentiments when full-year results are released.

Contracts galore

The final factor behind my bullish stance on Rolls-Royce are the deals signed this month. Malaysia Aviation Group is set to purchase 20 new Airbus A330neos, powered by the Rolls-Royce Trent 7000 engine.

The deal also includes a TotalCare agreement for its fleet. Engine servicing was a major cash cow for the firm before 2020 and I think this is could be the boost Rolls-Royce shares need.

The company also signed a huge contract with the UK government last week. Rolls-Royce’s MTU engine will now power the Boxer Mechanised Infantry Vehicle (MIV) for the British Armed Forces. The company is set to deliver 523 engines between 2022 and 2030 and will also play a big role in developing defence tech for the UK in the coming years.

Concerns and verdict

The board has stated that fluctuating commodity prices could impact the firm’s supply chain in 2023. In fact, Rolls-Royce’s operating margins dipped to 2.9% in H1 2022 from 5.9% in H1 2022. While this was predominantly because of a few one-time payments received last year, it also shows the impact of inflation on the business.

The group still expects single-digit underlying revenue growth this year. But this could underwhelm potential investors as there are FTSE 100 shares growing at a much faster rate right now.

However, Rolls-Royce is an established leader in the aviation space and has exciting projects in emerging areas. It operates closely with the UK government and is supporting the nation’s net-zero ambitions and also developing weapon tech. And if the above-mentioned trends continue as expected, the company could reach stability soon, making Rolls-Royce shares an FTSE 100 darling again.

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Director dealings: Rolls-Royce, Admiral, Dunelm

John Choong — Sat, 13 Aug 2022 07:00:00 +0000

Director dealings are essentially insider transactions for shares between directors and the companies they work for. These dealings are always made public, and are often considered a good indicator of a company’s future prospects. However, they don’t get nearly as much attention as other company news due to their complex nature. Nonetheless, here I’m breaking down this week’s biggest director dealings from three FTSE firms.

Rolls-Royce

Rolls-Royce (LSE: RR) is a British multinational aerospace and defence holdings company. It is one of the world’s largest makers of aircraft engines, and operates in four different segments. These include civil aerospace, power systems, defence, and new markets.

After a disappointing set of H1 results, Rolls-Royce shares saw yet another decline. But this week, a number of director dealings were carried out. Most notably, there was a huge purchase of shares from Chairwoman Anita Frew. The purchase from such a senior director should improve sentiment surrounding the stock.

Name: Anita Frew
Position of director: Chairwoman
Nature of transaction: Purchase of shares
Date of transaction: 5 August 2022
Amount bought: 50,000 @ Â£0.83
Total value: Â£41,300

Name: Lee Hsien Yang
Position of director: Non-Executive Director
Nature of transaction: Share purchase plan
Date of transaction: 8 August 2022
Amount bought: 1,161 @ Â£0.84
Total value: Â£980.23

Name: Wendy Mars
Position of director: Non-Executive Director
Nature of transaction: Share purchase plan
Date of transaction: 8 August 2022
Amount bought: 2,156 @ Â£0.84
Total value: Â£1,820.31

Name: Sarah Armstrong
Position of director: Chief People Officer
Nature of transaction: Share purchase plan
Date of transaction: 9 August 2022
Amount bought: 175 @ Â£0.86
Total value: Â£149.84

Name: Rob Watson
Position of director: President (Rolls-Royce Electrical)
Nature of transaction: Share purchase plan
Date of transaction: 9 August 2022
Amount bought: 175 @ Â£0.86
Total value: Â£149.84

Admiral

Admiral (LSE: ADM) is a British-based insurance company. It specialises in car insurance products, but also has a line of other offerings. These include home insurance, travel insurance, pet insurance, and van insurance.

The FTSE 100 firm released its H1 results earlier this week. Although profits slumped by almost half, the stock still shot up by 15% this week. This was most likely due to the announced special dividend of 15.8p. This would bring its total dividend to 60.0p per share. Investor sentiment was also further boosted when the Chairwoman purchased shares worth over Â£25,000.

Name: Annette Court
Position of director: Chairwoman
Nature of transaction: Share purchase plan
Date of transaction: 11 August 2022
Amount bought: 1,181 @ Â£22.44
Total value: Â£26,501.64

Dunelm

Dunelm (LSE: DNLM) is one of Britain’s biggest home furnishings retailers with an ever-growing market share. It operates over a 170 stores throughout the UK and offers over 50,000 products across a broad range of categories.

The FTSE 250 firm released its Q4 trading update not too long ago, and the interim numbers resonated well with investors. Nevertheless, its bottom line figure is yet to be released, and investors are wondering whether their expectations will be met. Therefore, the recent purchases by its CFO and another director could be an indicator of an earnings beat. The company is expected to report its official FY22 results in less than a month’s time.

Name: Vijay Talwar
Position of director: Non-Executive Director
Nature of transaction: Purchase of shares
Date of transaction: 4 August 2022
Amount bought: 9,670 @ Â£8.50
Total value: Â£82,156.32

Name: Karen Witts
Position of director: Chief Financial Officer
Nature of transaction: Purchase of shares
Date of transaction: 5 August 2022
Amount bought: 1,174 @ Â£8.45
Total value: Â£9,922.18

Types of shares

To provide context, there are a few types of shares that can be purchased by directors. Some directors opt to purchase shares via the open market. Having said that, directors also have the option to purchase shares via a share incentive plan (SIP).

A SIP is an employee plan for companies within the UK to flexibly award shares to employees. Publicly listed companies normally exercise this option because itâs tax-efficient for both the employer and its employees.

Types of Shares Within a SIP

In this week’s set of director dealings, a certain number of directors opted to purchase shares via their companies’ share purchase plans. This allows employees to purchase shares through automatic deductions from their pay. And this was the case with a number of Rolls-Royce directors, as well as Admiral’s Chairwoman.

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John Choong has positions in Dunelm Group. The Motley Fool UK has recommended Admiral Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I think now is the time to buy this FTSE 100 growth stock!

Dylan Hood — Mon, 08 Aug 2022 11:34:23 +0000

Rolls-Royce (LSE: RR) shares have continued to struggle over the past few months, a trend the company has endured since the start of the pandemic. Year to date the stock is down 35% and over a longer 12-month span it’s down 24%. However, I think that at the current price of 83p, now could be a great time to buy the stock for long-term growth.

Positive developments

When Rolls-Royce announced its FY21 results, they showed the firm had returned to profit after making a loss in 2020. Coming in at a modest £10m, the profitability marked a steep recovery from the £4bn loss the year before. More recently, Rolls released its H1 2022 results, in which I also saw some positives. Although it reported a loss for the period, there was a record order intake for Power Systems and a £1.1bn free cash flow improvement. The company also announced that margins are expected to increase throughout the second half of 2022. This should help it deliver a profitable full year.

In addition to this, Rolls is making great progress in delivering on some of its key strategic targets. For example, the disposal of subsidiary ITP Aero has now received regulatory clearance and is expected to happen soon. This will help free up cash and ease the pressure of the £5bn debt on the company’s balance sheet. It has already delivered on promises to cut costs by £1.3bn in 2021. This was a pivotal move to help it recover from the pandemic.

There are also several other positive signs for the company. For example, its leading position in small-to-medium nuclear reactor technology. Rolls expects to receive approval for these in mid-2024 and has already received interest from various governments around the world.

Finally, flight numbers are steadily increasing, which is good news for a company that makes most of its money servicing jet engines. For example, large engine flying hours increased 42% in the first half of 2022 compared to 2021, which will help increase the firm’s top line.

Not out of the woods yet

It’s no secret that the macro economy is pitted against growth stocks at the moment. Inflation is reaching sky-high levels – a whopping 12.7% in June in the UK. This is being coupled with an increase in interest rates. As rates rise (as they did again last week in the UK and US) investors can earn a higher risk-free rate. This deters people from investing in speculative assets like growth stocks. Interest rates are expected to rise more throughout the rest of 2022 and beyond. This could inhibit the growth of Rolls’ shares.

Why I’m buying

At 83p, Rolls shares are the cheapest they’ve been for a while. There are macroeconomic considerations to take into account, of course. But taking a long-term view, I think the stock could deliver serious gains. It’s returning to profitability, with a number of exciting projects in the pipeline, so I’m looking at adding Rolls-Royce to my portfolio today.

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Dylan Hood and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Are Rolls-Royce shares worth a buy in August?

John Choong — Mon, 01 Aug 2022 14:00:44 +0000

Rolls-Royce (LSE: RR) stock has lost a sizeable chunk of its value since the start of the year. Nonetheless, the share price staged a 9% recovery last month. As air travel continues to ramp up, Rolls-Royce shares could be worth a buy this August.

Wind’s blowing in the right direction

The FTSE 100 firm is set to report its half-year results in a couple of days (4th August 2022). So, this could be a buying opportunity for me, before the stock potentially rallies. Analysts in the UK donât always publish earnings estimates for quarterly or half-year periods. But the upcoming H1 earnings can serve as an indicator as to whether guidance laid out by management for the year can be achieved by the year end.

Metrics	Guidance & Consensus (FY22)	FY21
Underlying Earnings per Share (EPS)	1.50p	0.11p
Revenue Growth	3.5%	-4.4%
Operating Margin	3.8%	3.8%
Free Cash Flow	“Modestly positive”	-Â£1.44bn
Net Debt	Â£3.5bn	Â£6.1bn

Data source: Rolls-Royce Investor Relations

Given that Rolls-Royce earns a substantial amount of its revenue from servicing commercial aircraft engines, the return of global air travel towards pre-pandemic levels should do its top line an abundance of good. This has also been evident with the engine supplier tying up a number of TotalCare deals with airlines in July.

Data source: FlightRadar24

Additionally, the UK government is expecting to increase its defence budget to 3% of total GDP by 2030. The current budget sits at 2.25%. If this were to happen, Rolls-Royce could stand to benefit from a further stream of government contracts.

Data source: The World Bank

A valuable asset

Rolls-Royce also recently announced the successor to its current CEO, in Tufan Erginbilgic, who will be taking over in January. The appointment is a bit of a head-scratcher though, considering Erginbilgic’s lack of experience in the aerospace and defence field. He spent 20 years at BP, and served as its CEO for over five years.

Nevertheless, Erginbilgic is known for his creation of “significant value“. During his tenure at BP, he managed to quadruple profits, while holding a strong track record of execution and delivery. With plenty of exciting and unproven projects in the pipeline for Rolls-Royce, I’ll be hoping that he can help to deliver these new ventures. He will also have an incentive to improve the manufacturer’s profitability, as 30% of his Â£1.25m salary will be paid in Rolls-Royce shares. As such, I’m eager to see how he plans to navigate the company out of its mountain of debt.

Rolling in cash?

Speaking of debt, Rolls-Royce has a ton of it. That being said, if it manages to achieve positive free cash flow (FCF) by the end of the year, the British-based company may be well equipped to start paying off its debt in 2024. This would then give it the dry powder to fund its future projects.

Metrics (FY21)	Figures
Debt-to-Equity Ratio	-132%
Debt	Â£6.1bn
Cash and Equivalents	Â£2.6bn
Free Cash Flow	-Â£813m

Data source: Rolls-Royce FY21 Earnings Report

Taking everything into consideration, should I buy Rolls-Royce shares in August then? Well, it’s got plenty of exciting developments, and everything seems to be pointing in the right direction for the time being. This would normally entice me into investing. However, its financial position does leave me worried, as its earnings potential could be hindered by its debt repayments.

So, while I’m feeling rather upbeat about Rolls-Royce’s long-term future, I think there’s a possibility that its revenue and FCF could come in below expectations in H1 due to a slower than expected recovery in flying hours. For that reason, I’ll be putting Rolls-Royce on my watchlist for now.

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Up 9%, are Rolls-Royce shares finally changing course?

Suraj Radhakrishnan — Fri, 22 Jul 2022 14:10:53 +0000

In October 2020, the Rolls-Royce (LSE:RR) share price dropped to 38p. That was its lowest point in a decade, which highlights the incredible impact the pandemic had on the firm.

Since then, Rolls-Royce shares have struggled to break the 100p barrier. Share prices are down 28% in 2022 and 18% in the last six months. In fact, Rolls-Royce ranks 79th in the FTSE 100 index for returns in 2022.

But investors have seen some positive price action recently. In the last month, shares are up nearly 9%. And I think investor sentiment surrounding the company is finally trending in a positive direction. While these are the strongest signs of a turnaround in years, can the Rolls-Royce share price finally gain enough momentum to make a comeback? Let’s find out.

Last call before take off

With civil aviation still witnessing a laboured return to profitability, Rolls-Royce has used the downtime to overhaul its R&D. I think one of the most promising projects to come out of the engineering firm in recent times is the record-breaking hybrid electric aircraft.

With the renewable energy lobby getting stronger by the minute, electric engines are all the rage. And Rolls-Royce expects its all-electric passenger aircraft, in development with Norwegian firm Widerøe, to enter the market within a decade. This could overhaul the aviation industry and Rolls-Royce would be the chief architect.

Another big development today for the company is the long-term TotalCare servicing deal signed with Vietnamese airline VietJet for its fleet. This is the largest recent order for Rolls-Royce, which has faced huge losses without engine upkeep contracts. And I see this deal as a strong sign that civil aviation is getting back on track.

Growing order book and revenue

Rolls Royce’s thriving power systems and defence wings could be the lifeline it needed. Green energy has become a huge driving factor behind governmental grants and private investments. The latest proposal from the UK government expects a £400bn inflow into the sector within the next 5-10 years.

And Rolls-Royce’s small nuclear reactor project could have a big role to play. Last year, the firm received an order intake of £3.3bn, 24% higher than 2020.

Rolls-Royce’s defence order book has also grown considerably in the last six months. The company has a close partnership with UK’s air defence systems and is currently developing anti-missile tech and hypersonic missiles. This comes after the recent push to bolster defence systems across the world after Russia’s attack on Ukraine.

Yes, Rolls-Royce’s huge debt of £5.1bn is a concern. Also, while civil aviation is recovering, losses from two years of grounded planes could weigh on the company for a few years. Also, these recent R&D projects are not cheap. In fact, the company is spending in excess of £1bn a year on exploring new tech. While this is a reason why I am bullish on the company, it could also quickly turn sour for investors.

This brings me to why I am awaiting Rolls-Royce’s half-year results, scheduled for 4 August. Evidence of positive cash flow could trigger a recovery in this reactive market. But if the large order book doesn’t translate to cash-in-hand, Rolls-Royce shares will continue to struggle. I am watching the results carefully and would make an investment if they are favourable.

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Rolls-Royce shares are in hyper innovation mode! Should I buy?

John Choong — Wed, 20 Jul 2022 16:30:00 +0000

Rolls-Royce (LSE: RR) is most renowned for its civil aerospace division. However, its other businesses in defence and power systems also hold plenty of potential. With the company disclosing a flurry of new deals, partnerships, and innovations this week, I think Rolls-Royce shares are worth a closer look.

Innovations taking off

As defence spending ramps up worldwide in light of the Russia-Ukraine war, Rolls-Royce stands to be a beneficiary. The FTSE 100 firm unveiled a new Orpheus engine this week for its defence segment. The radical new engine can be used for low-cost, unmanned, small engine applications. Furthermore, its agile approach allows it to be built in half the time of a normal engine. This changes the way products and technologies are developed for the UK’s Future Combat Air Strategy (FCAS), and will help deliver the capabilities to fight and win in most hostile environments.

Additionally, Rolls-Royce announced a collaboration with the likes of the Royal Air Force, UK government, and Reaction Engines to develop hypersonic technologies. This is thought to be groundbreaking as the UK lags behind the likes of China, Russia, and the US in that space.

Nonetheless, the most exciting development for me this week was the announcement of the H2ZERO partnership with easyJet. The purpose of the programme is to pioneer the development of hydrogen combustion engines for aircraft by the mid-2030s. If successful, this could be revolutionary and do the Rolls-Royce share price wonders, as itâll have first mover advantage in the hydrogen fuel space.

Cutting edge technology

The exciting developments don’t just end there though. The manufacturer announced that it’s in the final build phase of its UltraFan programme, with tests set to start this year. The UltraFan is among the products Rolls-Royce has in its portfolio to encourage more sustainable air travel. It also boasts a suite of technologies that can be used in the group’s energy and power systems segments.

Source: Rolls-Royce UltraFan

Additionally, the power and flexibility provided by UltraFan gives it the potential to power both narrow and wide-body aircraft. Given that the former is a segment of the commercial market that Rolls-Royce has no exposure to, this would expand Rolls-Royce’s market share in the aero engine space.

Total care of money

Despite all the exciting news, however, it’s crucial to note that the company can’t fund these projects if it doesn’t shore up its balance sheet. As such, Rolls-Royce will have to ensure two things. The first is to wrap up its ITP Aero sale, worth Â£1.5bn. The second would be to have free cash flow as soon as possible. If this can be achieved, the engine supplier should be able to start paying down its debt by 2024.

Metrics (FY21)	Figures
Debt-to-Equity Ratio	-132%
Debt	Â£6.1bn
Cash and Equivalents	Â£2.6bn
Free Cash Flow	-Â£813m

Source: Rolls-Royce FY21 Earnings Report

Nevertheless, strong tailwinds from the travel industry should help with free cash flow, while three TotalCare deals struck with flypop, Norse Atlantic, and ITA Airways should serve as further catalysts. The deals bring an additional 50 Rolls-Royce engines to the servicing line.

With all that in mind, will I buy Rolls-Royce shares? Well, this week’s developments are certainly enticing. However, I’m still wary about the company’s financials. So, until these show a concrete improvement, I won’t be buying the shares. Instead, I’ll be keeping it on my watchlist for now, and cheering on from the sides.

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.