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The Rolls Royce share price could end the year way up and here’s why

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A Rolls-Royce employee works on an engine
Image: Rolls-Royce

The Rolls-Royce (LSE: RR) share price has not been kind to long-term shareholders. Most investors will know the reasons why, but just to recap, it makes a lot of its money from airlines and how many miles are flown, so it was hit hard by the pandemic.

It has had to raise cash from shareholders and postpone its plans and timeline to improve cash flow. There’s no doubt then that Rolls-Royce is far from a ‘no brainer’ investment. Its shares are quite volatile and will be hit by any further lockdowns or coronavirus variants.

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However, if we are on a path to getting back to a near normal environment, then Rolls-Royce could be a great recovery share. On balance I expect its shares to do well in what remains of this year. Here’s why.

Why the Rolls-Royce share price could rise

 I think one of the main catalysts for investors falling back in love with Rolls-Royce could be disposals. Think about how well it has worked at Aviva under Amanda Blanc. Rolls-Royce has a plan for £2bn of disposals that is underway already.

It recently announced the sale of its 23.1% stake in AirTanker Holdings Limited. The deal should generate £189m and be completed in the first quarter of 2022. Rolls-Royce says it will use the cash to reduce net debt.

An activist has also invested in Rolls-Royce, which will either lead to management taking action to improve the share price or new management coming in. Either way this could be good for ordinary shareholders and for the Rolls-Royce share price.

Already a new chair is set to start next month. The appointment of Anita Frew could see a new strategic direction for the group, which could excite investors and boost the share price. My guess is she’ll want to make a bit of a splash, not least because of pressure from investors. 

Looking longer term

Beyond this year, I think there are reasons for optimism for long-term investors. Rolls-Royce could rerate significantly once its balance sheet improves, debt comes down, and air travel gets back to normal. After all, many people still want to travel.

Also, Rolls-Royce has other strings to its bow. Its defence earnings are more reliable and stable. The recent submarine deal between the UK, US, and Australia could be a boost for the Rolls-Royce share price, as the engineer works on submarines.

There may also be opportunities from renewables and finding alternative power sources to gas. Rolls-Royce is involved in a consortium that wants to build modular nuclear reactors. Given the unpredictability associated with renewables such as wind, a consistent source of power such as nuclear may be appealing to the UK and many other countries.

In the end, I still think this is a pretty high risk investment given the increase in the share count due to the pandemic. That’s why it won’t automatically go into my portfolio. That said, I do strongly suspect the disposals and a new chair mean the Rolls-Royce share price could well end the year up, at least in my opinion.

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Andy Ross owns no share 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.

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