Is the Rolls-Royce share price set for take-off?

Stuart Blair — Tue, 29 Mar 2022 06:13:00 +0000

The Rolls-Royce (LSE: RR) share price has faced a turbulent past couple of years. Indeed, due to the pandemic, and the fact that it was forced to issue more shares to stay afloat, the share price sank to around 30p in October 2020. But it has managed to stage a recovery recently, rising over 100p. With takeover rumours, and the return of flying, is the Rolls-Royce share price about to soar?

Takeover rumours

Last week, there was a blog post on financial news site Betaville, that Rolls-Royce may be involved in a “significant corporate transaction, such as a merger or even takeover offer for the business itself”. Takeover talk nearly always has a positive effect on a company’s share price, as acquisitions tend to come with a price premium. Understandably, the Rolls-Royce share price has gained some momentum since this news was announced.

Even so, I have doubts about this piece of information. In fact, the British government have a golden share in Rolls-Royce, meaning that it can veto any potential deals. As Rolls-Royce is heavily involved in the defence industry, I believe it’s unlikely that the government will allow a bid for the whole company, especially from a foreign bidder. The only possible candidate that may be permitted to launch a bid is BAE Systems. This is because the government also holds a golden share in that company. But this doesn’t seem part of BAE’s current strategy, and for these reasons, a takeover of Rolls-Royce seems unlikely to me.

Therefore, I will not be buying Rolls-Royce based on speculative takeover news, as I think that there is very little chance anything will come to fruition. Besides that, I prefer to buy stocks for the long term rather than in the hope of a fast turnaround.

Other factors

So how appealing is it as a longer-term investment? Rolls-Royce released its full-year 2021 results last month, and there were a number of very promising signs. For example, it managed to report a statutory profit of £124m, in comparison to a statutory loss of over £3bn last year. Thanks to restructuring efforts, it has also managed to save more than £1.3bn. This showed signs that the firm was recovering during 2021. There’s hope that a further recovery will be achievable throughout 2022.

This would be helped by the pent-up demand for foreign travel this year, and airline operator IAG expects its capacity will be around 85% of 2019 levels this year. As such, Rolls-Royce should benefit from the increased demand, as its revenues are dependent on flying hours.

There was a slight negative, because it was announced that the CEO, Warren East, is set to resign. This may add some uncertainty for the group and strain the Rolls-Royce share price.

I think the Rolls-Royce share price is too cheap, especially as it has managed to reach profitability. This cannot be said for most other companies in the travel industry. As such, despite the multitude of risks, I’m very tempted to buy, as I feel there’s a large amount of upside potential. With travel reopening at speed, I feel that the next few months could be particularly positive for the Rolls-Royce share price and there is certainly the possibility that it could soar very soon.

The post Is the Rolls-Royce share price set for take-off? appeared first on The Twelfth Magpie.

More reading

Stuart Blair owns shares in BAE Systems. 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.

I was right before about the Rolls-Royce share price! What am I doing now?

Stuart Blair — Tue, 05 Oct 2021 07:09:44 +0000

At the start of September, I wrote a bullish article on Rolls-Royce (LSE: RR), stating that the shares were a bargain. I pointed to recovering profits, strong liquidity, and its restructuring last year. Since this article, things have developed further, with the company selling its Spanish business for €1.7bn and winning a multibillion-dollar contract from the US Air Force. This has seen the Rolls-Royce share price rising from 112p, when I wrote about it last, to its current price of 144p. This is a rise of nearly 30% (and it’s up almost 237% in a year). As such, do I now think it’s time to bank profits or is there further to rise?

The recent rise

There have been three main catalysts for the rise in the Rolls-Royce share price recently. Firstly, it sold its Spanish business for €1.7bn to a consortium led by US private equity firm Bain Capital. This is a key step in strengthening the finances of the company, and it goes a long way to achieving its promise to shareholders of making £2bn of disposals this year. One of the main risks that I have previously pointed out with Rolls-Royce is its dreadful balance sheet, and this will hopefully be of major assistance in boosting it. CEO Warren East also hopes that it will help Rolls-Royce return to an “investment-grade credit profile”, allowing it to borrow money more easily.

Rolls-Royce also rose due to its new contract to supply F130 engines for the US Air Force for the next 30 years. It’s estimated that this could be worth as much as £1.9bn. After revenues were hit so heavily during the pandemic, it’s extremely promising to see this new source of revenue. Hopefully, this will also lead to rising profitability over the next few years.

Finally, the full reopening of transatlantic travel is extremely good news for the company. This is because the company is paid based on the number of hours flown by the aircraft using its engines. This is a major step into the full reopening of international travel and will surely be met with a further recovery in profits in the civil aerospace division.

Risks

Despite these advances, risks still abound with Rolls-Royce. Indeed, coronavirus cases remain high and there’s always the risk of international travel being further restricted in the future. This would likely have a devastating effect on the Rolls-Royce share price.

Although the sale of its Spanish business should have led to improvements, the balance sheet is still very damaged. According to the last official company accounts, this includes negative shareholder equity, where the company’s liabilities outweigh its assets. This will restrict its ability to deliver any shareholder returns, longer term.

What’s next for the Rolls-Royce share price?

As it’s risen 30% since the last time I wrote about the company, I’m not rushing to buy straight away. This is because a correction could be forthcoming. Even so, I still feel it’s cheap and if I owned some shares, I wouldn’t sell either. For now, I’ll just be keeping a keen eye on the company’s performance.

The post I was right before about the Rolls-Royce share price! What am I doing now? appeared first on The Twelfth Magpie.