The Rolls-Royce [RR] share price was already significantly lower than its 2018 peaks above 350p before the pandemic began more than a year ago, as the aerospace and defence company wrestled with some serious issues, including problems with its Trent 1000 engine which powered the Boeing 787 Dreamliner. Rolls-Royce’s share price has at least staged a recovery from a 52-week low of just 34.59p on 2 October, rising 202% since then to 104.34p at the close on Tuesday 11 May, albeit off the year highs seen in March.
The issues led to Roll-Royce posting a £2.9bn operating loss in its 2018 full-year numbers, followed by an £850m loss in 2019. Last year’s operating loss of £2.1bn was almost as large as 2018, and while the size of it is certainly sobering, the uncertainty about when air travel is likely to return to any kind of normal post-pandemic means that, unlike last year, optimism is more measured.
If the £2.1bn operating loss wasn’t bad enough, with other costs added the loss ballooned to an even bigger £4bn, including a £1.7bn underlying finance charge related to its FX hedge book, due to lower US dollar receipts. Management were still fairly optimistic about the future, estimating free cash outflow of £2bn for 2021, based on wide-body engine flying hours of 55% of the levels of 2019, with an expectation of turning cashflow positive at the end of the second half of this fiscal year with positive free cashflow of £750m in 2022, based on engine flying hours of 80% of 2019 levels.
Rolls-Royce share price stalls
The company was, and still is to a certain extent, hugely reliant for a good proportion of its revenue on these aviation air miles, which means it's still facing a significant cash outflow, even with thousands of job cuts and cost savings. The expectation of a pickup in air travel to the tune of 55% of 2019 levels in the second half of the year still appears optimistic, and the Rolls-Royce share price performance since that March guidance appears to bear that out for now, with the shares falling back from a year-high at 127.20p in March.
This Q1 update is unlikely to show much of an improvement in terms of its civil aerospace division, given the virtual shutdown of air travel over the past three months, though the US market has been more resilient, and is starting to return to a semblance of normal. As economies start to reopen for the summer season, we can expect to see improvement in the overall number of engine hours flown, however as events in India and other parts of the world have shown, the virus has continued to wreak havoc. This is likely to slow down any return to normal, as traffic light systems act as a further barrier.
Extra £9bn liquidity raised
CEO Warren East said that the £9bn of extra liquidity the company raised should be enough to see it through the next two years, even if there is no aviation rebound. This is probably just as well, as Rolls-Royce may well need it, if it’s unable to dispose of any more assets. The sale of Bergen engines has been held up by the Norwegian government on national security grounds, while talks over the disposal of Spanish operation ITP Aero are also being hindered by concerns over job losses.
How will the Rolls-Royce share price react when the FTSE 100 constituent releases its Q1 results at 7am on Thursday 13 May?
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