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Stock Watch

Why Rolls-Royce’s share price motored upwards following US Air Force deal

Rolls-Royce share price: A man in Rolls-Royce uniform looking at an plane engine

The Rolls-Royce [RR] share price is celebrating its best month since last November, with gains of more than 25% in the four weeks to 4 October, during which time it peaked at an intraday high of 148.45p – its highest price since March 2020. 

Having stagnated for most of the year until now, the Rolls-Royce share price is trading 27.8% above its opening price for 2021 at 142.14p as of 4 October. Over the last 12 months, Rolls-Royce’s share price has gained 264.6%. What’s fuelling its recent rally? 

What’s driving up the Rolls-Royce share price?

The recent run of gains began on 15 September. Over the ensuing days, the Rolls-Royce share price gained 39.8% to a near-term peak close of $147.48 on 27 September, driven initially by the company announcing its intention to set a world record 300mph speed with its first all-electric plane later this year.

However, other emerging tailwinds have sustained the surge. News emerged on 26 September of a contract worth up to $2.6bn (£1.9bn) to supply F130 engines for the US Air Force’s fleet of B-52s for the next 30 years. Parts for the engines will be produced at the company’s recently revamped factory in Indianapolis.

Additionally, Rolls-Royce confirmed the sale of ITP Aero, its Spanish turbine manufacturing business, for €1.7bn (£1.45bn). CEO Warren East hailed the sale as “a significant milestone for our disposal programme” as the company looks to bolster a depleted balance sheet in the aftermath of the coronavirus pandemic. 

An “unprecedented year”

Rolls-Royce’s 2020 Annual Report, which was released back in March, revealed losses of £3.95bn throughout the calendar year. East acknowledged that it had been “an unprecedented year” in the wake of the results, highlighting the impact that the pandemic had on the company’s civil aerospace business.

“In response, we took immediate actions to address our cost base, launching the largest restructuring in our recent history, consolidating our global manufacturing footprint and delivering significant cost reduction measures,” he said. 

East also highlighted the “decisive actions” the company had taken to improve its “financial resilience”, including “a regrettable, but unfortunately very necessary, reduction in the size of our workforce”.

East’s statement also referred to “a good start on our programme of disposals”, of which the ITP Aero offload is the latest example.

Low carbon future

The measures appear to be working. Rolls-Royce’s half-year results for 2021 reported an operating profit of £307m, up from a £1.63bn operating loss 12 months prior. Free cash flow had also improved from -£2.86bn to -£1.17bn. 

Developing a rapid, all-electric plane is a far-from-trivial development. Investment in “low carbon opportunities” in its end market is, according to East’s statement in the 2020 annual report, a key component of the company’s drive to “ensure we are well-positioned to take advantage of the transition to a lower-carbon economy and growing demand for more sustainable power solutions”.

Susannah Streeter, an analyst at Hargreaves Lansdown, heralded the US Air Force contract as “yet another ray of sunlight” for Rolls-Royce, according to Yahoo Finance. 

CMC Markets chief market analyst, Michael Hewson, said that the contract is “an additional boost in the wake of last week’s news that transatlantic travel is set to resume, giving a boost to the goal of meeting the company’s target of achieving 55% EFH (engine flying hours) for this fiscal year”.

“Coming on top of weekend reports that the government is looking to put money into its mini nuclear reactor technology, in order to alleviate and diversify the UK’s energy mix, the stars finally appear to be aligning for this major UK blue-chip,” he added. 

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