I thought Rolls-Royce (LSE: RR) would recover this year. But no. A sharp dip in the days since the Russian invasion of Ukraine has helped push the Rolls-Royce share price down 25% so far in 2022.
That reverses the late-2021 gains and then some. Over the past 12 months, the shares have now lost 28% of their value. At 92p as I write, Rolls-Royce has edged into penny share territory. I can’t help seeing it as a buy at that price.
What makes me bullish now? One thing is the way the company has reshaped itself over the past few years. Rolls recorded an underlying operating profit in 2021 of £414m (statutory £513m). From a £2bn loss the previous year, that’s an impressive turnaround.
After restructuring, a company does face fresh challenges. And that’s one of the biggest risks I see to the Rolls-Royce share price future now. A strengthening balance sheet can go a long way towards supporting it, though. And Rolls has made good progress there.
Disposals are expected to raise around £2bn. And Rolls has achieved restructuring savings of more than £1.3bn a year ahead of schedule. The key now will lie in those portions of Rolls-Royce’s business that are expected to grow. And its not all about producing hydrocarbon-guzzling aeroplane engines.
The aviation business is coming under increasing pressure to wean itself away from fossil fuels. And the war in Ukraine bringing to the fore our partial dependence on Russian supplies can only add to that impetus.
Rolls-Royce is investing heavily in two new areas under net zero ambitions. The company says “Rolls-Royce Electrical achieved key product advances with a world speed record for our all-electric aircraft.“
In addition, Rolls is developing what it calls Small Modular Reactors (SMR). That’s nuclear technology, which has been out of favour in some quarters. But it looks increasingly like an inevitable part of the world’s post-hydrocarbon landscape.
Big R&D spend
The company says that Rolls-Royce Electrical and Rolls-Royce SMR could together generate more than £5bn annual revenue by the early 2030s. That should help the Rolls-Royce share price in the long term. But to get there, Rolls is going to have to invest a lot of cash.
Rolls spent £1.2bn on R&D in 2021, and says that “2022 will show a significant increase in Research & Development costs.”
But we also heard that: “Over the next five years, we expect cumulative R&D investment in Rolls-Royce SMR and Rolls-Royce Electrical of over £1.0bn to be funded by third-party grants and investments as well as self-funded cash investment of over £0.5bn.“
At the end of 2021, Rolls-Royce had liquidity of £7.1bn, including £2.6bn in cash. Net debt stood at £5.2bn, though that does include lease liabilities. Excluding leases leaves £3.4bn debt, which I think is manageable.
Rolls-Royce share price weakness?
I definitely see profitable new technologies in Rolls-Royce’s future. My main fear is that shorter-term reliance on traditional products for the aerospace industry could keep the pressure on the Rolls-Royce share price.
I fear the remainder of 2022, and perhaps beyond, could bring continuing weakness. But with its shares now under £1, I am thinking of buying Rolls-Royce for the long term.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.