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Rolls-Royce shares up 12% in the last month

Rolls-Royce share price: a uniformed Rolls-Royce employee works on one of the company's jet engines.

It’s been a difficult year for the Rolls-Royce [RR] share price. The stock, which closed at 76.99p on Friday 28 October, has tumbled by more than a third in 2022 as uncertainty over the travel sector has weighed on investor sentiment towards the engineering firm. Rolls-Royce’s fortunes are closely tied to those of the airline industry as its civil aerospace division accounts for almost half of underlying revenue.

However, despite these struggles there are signs that the share price may have bottomed out. Since hitting a 52-week low of 64.44p during intraday trading on 28 September, Rolls-Royce stock has climbed almost 20%. Ahead of the jet engine maker’s third-quarter results announcement on Thursday, we explore whether the shares could be about to take off. 

Has Rolls turned a corner?

Since the September low there is evidence to suggest that Rolls-Royce shares may have found a base. Based on technical analysis carried out by our chief market analyst Michael Hewson, the stock’s recent move above its 50-day simple moving average (SMA; the pink line on the chart below) could signal further gains. 

“We may see a move towards, and possibly above, the 80p level if this week’s Q3 numbers point to any sort of improvement in the fortunes of the business,” said Hewson. 

Rolls-Royce share price, February 2022 - present

Source: CMC Markets

Rolls-Royce looking to recover from half-year loss

Earlier this year the company posted a first-half underlying loss before tax of £111m, versus a profit of £133m in the year-ago period. The loss was incurred despite underlying revenue increasing 1.5% year-on-year to £5.3bn, as higher costs squeezed margins. Gross margin fell to 17.7% in the first half, down from 21% a year earlier – a key concern for investors and an issue with which incoming CEO Tufan Erginbilgic will need to get to grips when he takes over from Warren East on 1 January 2023.

Underlying revenue in the crucial civil aerospace division increased 8% year-on-year to £2.34bn in the first half, accounting for 44% of total underlying revenue. Large engine flying hours were at 60% of 2019 levels and are expected to rise to 70% by year-end, but aren’t forecast to return to pre-pandemic levels until 2024. 

The power systems division also performed well in the first half, with revenues rising 20% annually to £1.37bn. However, the defence division saw revenue fall 9% over the same period to £1.61bn, with the company blaming the timing of the sign-off on the latest tranche of F-35B jets and lower spare engine sales. 

The disappointing results, and net debt remaining broadly unchanged at a bloated £5.1bn, sent the shares to a 23-month low in late September. On 27 September Rolls-Royce announced the completion of the sale of ITP Aero, generating sales proceeds of €1.6bn that will go towards reducing the company’s debt pile. 

Investors will be hoping to see an improvement in margins and further progress on debt reduction when Rolls-Royce issues its Q3 trading update before markets open on Thursday 3 November.

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