The Rolls-Royce (LSE: RR.) share price has had a good year so far.
We’re still looking at a fall of more than 50% in the past five years, though. And the next big news should be first-half results for 2023.
2023 interim
I rate the Rolls-Royce share price as about fair value. I reckon this year’s gains are justified by the improvement in cash flow. But I see the firm’s big debt as rightly holding the stock back too.
Results for the first half of 2023 aren’t due until the first week of August. But that’s only just over a month away, and I expect investors are eagerly waiting for the figures.
I’ll be looking out for some specifics, which I reckon might fend off the bears and give the bulls a boost.
The most important thing for me is cash. Rolls famously told us it should get back to positive cash flow in the second half of 2022. And it did just that.
Cash flow outlook
The key for me now is this year’s cash flow. At full-year results time, the Rolls guidance suggested free cash flow of between £0.6bn and £0.8bn for 2023. The firm said that was in part due to “early benefits from transformation.”
May’s trading update told us: “Our financial performance is improving reflecting positive changes driven by our transformation programme.”
But it kept its cash flow guidance unchanged, and reminded us that it should be seasonally weighted to the second half.
Now, the board seems conservative to me, which is good. It’s surely better to under-promise and over-deliver. So I’m hoping to see first-half cash flow close to £0.3bn, half of the lower range of that annual guidance.
Debt reduction
Debt is the other side of the cash flow coin. And the more cash Rolls can generate, the more debt it can pay down.
Debt reduction was one of the jewels of those 2022 results, but I don’t think the picture is as clear as it might seem. It got its net debt down from £5.2bn to £3.3bn, and that’s impressive.
The firm put it down to a combination of disposals and cash flow. By September 2022, Rolls had completed a £2bn disposal programme. Without that, there’s no way to tell how much debt the firm might have been able to pay off.
Cash flow contribution
So it’s hard to see how much contribution the year’s cash flow (of £505m from continuing operations) actually made. And I see that as a key to 2023 progress.
I really can’t put a figure on it, but I want to see how much of Rolls-Royce’s H1 cash flow goes towards reducing debt. That’s what I need in order to feel more confident about the board’s long-term debt reduction ability.
So for me, the H1 results will be all about some key numbers with pound signs in front of them. I want to see enough to justify a forecast 2023 price-to-earnings (P/E) ratio of 35, followed by 22 for 2024.
I’m upbeat. But if we don’t see the right progress, I think the shares could dip again.
