Rolls-Royce (LSE: RR) shares are in the spotlight again. The engine maker recently released its full-year results, which revealed it made a loss in 2020. I’ve commented on them previously, but I wasn’t surprised by the news. Especially given how the pandemic hit the travel industry last year.
The stock is now in the limelight after the sale of a business was blocked by the Norwegian government. But I’m not worried about this and I’d still buy Rolls-Royce shares in my portfolio. Here’s why.
Blocked sale
Disposing businesses is part of Rolls-Royce’s recovery plan. It intends to raise at least £2bn from the sale of its assets by 2022. But the disposal strategy has faced a hurdle.
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Rolls-Royce’s sale of Bergen Engines to the Russian company TMH Group has been halted by the Norwegian government. The reasons were based on national security grounds.
The Norwegian government said that “the technology possessed by Bergen Engines, and the engines they produce, would have been of significant military strategic interest to Russia, and would have boosted Russian military capabilities”.
So what does this mean for Rolls-Royce shares now?
I’m not too concerned about the news. Of course, it puts a spanner in the works for Rolls-Royce but this was only a small sale. The Bergen disposal would have raise approximately £130m. This is a drop in the ocean compared to the bigger £2bn total Rolls-Royce expects to raised from the sale of its assets.
The shares took a hit on the news, but I think this was a reality check that the FTSE 100 firm isn’t out of the woods yet. It’s worth noting that Rolls-Royce has a plan but it won’t be smooth sailing.
Rolls-Royce released a statement in response to the blocked sale. For now the disposal process has been paused but the company is keen to sell the business. Rolls-Royce is now working with the Norwegian government to “swiftly find another option”.
Bright side
I don’t think things are all bad for the engine maker. For now it has enough liquidity to weather the coronavirus storm. It has raised money from a rights issue and there are sufficient credit facilities in place.
According to its 2020 full-year results, approximately 30% of Rolls-Royce’s revenue comes from its defence division, which includes contracts with the UK and US governments. This should provide the company with some revenue stability and visibility.
The defence division should remain robust especially after it has 90% order cover for 2021. I like that Rolls-Royce has high barriers to entry and a strong brand, which should hold the business in good stead.
The long road to recovery
I don’t underestimate that Rolls-Royce has a long journey ahead to recovery. The pandemic hit its main business of producing and servicing aircraft engines very hard.
Rolls-Royce shares are highly dependent on the vaccine roll-out as well the easing of lockdown restrictions. The stock is likely to be sensitive to delays in returning to pre-coronavirus normality.
For now I’d buy the stock in my portfolio. I reckon the company has done enough to survive and the worst it behind it.
