At the start of the year, the Rolls-Royce (LSE: RR) share price was nearly 700p. Nine months later, and the iconic British engineering company has fallen nearly 80%. This is mainly due to its links with the aviation industry, which led to the firm posting a net loss of $5.4bn for the first half of 2020. But with the company managing to minimise some costs, and with its reputation for excellence, are the shares now too cheap to ignore?
Civil aerospace division
The bulk of the losses were in the company’s civil aerospace division. This is because the group produces and services aircraft engines. The current lack of flights taking off, landing and engines needing to be serviced has therefore hit revenues hard. It also charges a fixed amount on a per-flying-hour basis, and this meant that the grounding of planes was another factor in the dismal half-year results.
With the aviation industry in turmoil, the firm has since stated that it does not expect a recovery to 2019 levels until the middle of the decade. As a result, I cannot see the Rolls-Royce share price recovering to its former level, especially with the burden of over £1.7bn of net debt. The amount of debt on the balance sheet is also a figure that I expect to continue increasing.
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Are there any positives?
Fortunately, it’s not all negative. For example, its role in the defence sector does look reliable, as shown by its recent revenue rise of 2%. Operating profits in the defence sector were also able to rise 19% to £210m. Although defence only makes up a fraction of Rolls’ business, it’s still a positive sign to see it performing well. It could therefore help offset some losses in the next few years.
The group has also been able to cut costs through its restructuring efforts. In fact, the company is looking to cut around 9,000 jobs by the end of the year, saving around £1.3bn by the end of 2022. In addition, it is considering selling the ITP Aero business as a way of improving the balance sheet.
This means that although I cannot see the Rolls-Royce share price making a full recovery, there are indications that it may be oversold, and the future is not as bad as some may think.
So is the Rolls-Royce share price too cheap?
Considering Rolls’ reputation for excellence, its small market-cap of just £3bn does seem unfair. Saying this, I do still believe that the Rolls-Royce share price has further to fall. This is mainly because the company has already confirmed that it will need to raise more money. A large figure of around £2.5bn has been stated. With is credit rating cut to junk status, the firm will probably have to resort to issuing more shares. Although this will help boost liquidity, it will also have the adverse effect of stock dilution and the share price should fall further. As a result, I’d avoid Rolls-Royce for the time being.
