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.
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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.
