Rolls-Royce (LSE:RR) recently reported its full-year results for 2020. The company reported a loss of around £4bn, worse than the expected loss of £3.1bn, showing how badly the pandemic hurt civil air travel.
Although the annual results weren’t good, here are two reasons why I’d nevertheless buy at the current Rolls-Royce share price.
I think 2022 might be a better year
One reason I like Rolls-Royce at the current share price is that the future might be better.
While 2020 was a terrible year for Rolls-Royce and 2021 has disappointed so far in terms of engine flying hours, I reckon 2022 may be a year to look forward to. For 2022, management expects large engine long-term service agreement flying hours to be approximately 80% of 2019 levels. Their more pessimistic scenario is for around 70% of 2019 levels. That compares to management expectations for this year of about 55% of 2019 levels in the base case and about 45% in the pessimistic case. The number of engine flying hours is important because Rolls-Royce makes a lot of its money from long-term contracts that’s dependent on those engine flying hours.
Management also sees the power systems business sales returning to around 2019 adjusted levels next year as well. Management believes the power systems division benefits from economic growth, which is something that fortunately many economists project a lot of in the coming year.
Free cash flow in the future?
Another reason I like the stock at the current Rolls-Royce share price is that the company expects to potentially generate a fair amount of free cash flow next year.
In terms of estimates, management believes Rolls-Royce could make over £750m in free cash flow as early as 2022 assuming that the recovery in the flying hours is over 80% of 2019 levels and also the company makes 200–250 wide-body deliveries. The free cash flow projection excludes any potential impact from any disposals.
With more free cash flow, management can do a lot more things. They can pay a dividend, reduce debt, or buy back some shares. They can invest in new organic opportunities or do M&A that could help add value or help them achieve goals faster as well.
In terms of their aims, management has a goal of developing low carbon solutions for hybrid, hydrogen, and electric powered craft. I reckon having more free cash flow to fund research could help with that goal. If the market remains bullish on green stocks by that time and the market buys into Rolls-Royce becoming more ‘green’, I think there is the chance that Rolls-Royce shares could benefit from the perception.
The Rolls-Royce share price: what I’d do
While the company’s future to me looks better than current conditions, guidance is something that can change if circumstances change. If Covid-19 variants become more of a problem, the engine flying hours might not recover like management expects. If that happens, management could find it pretty difficult to achieve their free cash flow projections.
In my view, however, I think the worst is probably behind the stock at least in terms of this pandemic and its effects. Global GDP is growing and the world has numerous different vaccine rollouts that are ongoing.
I think there is a lot to like about Rolls-Royce, including the expected stronger year in 2022 and the anticipated positive free cash flow next year. As a result, I’d buy and hold Rolls-Royce shares.
