Shares in Rolls-Royce (LSE: RR) have lately been showing the sort of movement more associated with the company’s engines. Moving down to become a penny share and now gaining altitude again, the shares have certainly encountered some heavy weather. But the Rolls-Royce share price is 30% higher than it was a year ago. Can it now go higher?
Demand recovery is in progress
One of the drivers for the Rolls-Royce share price is the utilisation rate of its installed engine base. They higher the flying hours, the greater the need for servicing. That is good for Rolls-Royce’s service revenues.
There have already been signs of growing civil aviation demand recovery in markets like the US. Recently there has been similar news closer to home. Last week, for example, Ryanair said that it is seeing “a strong rebound of pent up travel demand into August and September” which it expects will continue in the following months. Rival Easyjet referred to “bookings surges experienced following selective easing of travel restrictions”.
That sort of improvement in the number of passengers taking flights should be good for the Rolls-Royce share price, as long as it is sustained. The company also derives revenues from a number of businesses apart from civil aviation, such as defence. Performance in those business units has not weakened as much as that of the civil aviation division during the pandemic. If civil aviation demand continues to improve, I think Rolls-Royce could soon be reporting stronger performance throughout its business. That could help boost the Rolls-Royce share price.
Cash flow news this week
The company is set to release its interim results this Thursday. I think that could be an important event for the Rolls-Royce share price.
Part of the nervousness investors have had about Rolls-Royce is its liquidity. Will it need to repeat the very dilutive rights issue it had last year? The company has repeatedly said that it expects to become cash flow positive in the second half of this year. If it does that, investors’ liquidity concerns will ease. That could help boost the share price.
If Thursday’s results are good, that could lift the Rolls-Royce share price. But the thing I will most be keeping my eye on is the cash flow news. I expect the company to update on its target in the interim results. If it says it still expects to become cash flow positive in the second half – which is now underway – I see it as positive for the Rolls-Royce investment case.
Rolls-Royce share price outlook for August
So, what does that mean for the Rolls-Royce share price in August and beyond?
If the interim results are strong, I think it could provide a boost for the shares. I therefore think that the Rolls-Royce share price could rise in August. But I also see risks. Demand recovery may be slower than expected, hurting the restoration of positive cash flow. Further lockdowns could mean future demand falling again. The dilutive rights issue last year points up the risk of any future liquidity crunch leading to further dilution.
I’ll be digesting Thursday’s results eagerly, but for now am not tempted by the Rolls-Royce share price.
