The Rolls-Royce (LSE: RR) share price is back under £1 – again. In fact, it’s now down ~25% since the start of the year.
The share price has unsurprisingly struggled since the pandemic brought air traffic to a screeching halt back in Q1 ’20. I remember it well, being out in Vietnam at the time. It was an interesting time – both the mad journey home and the well-known pandemic-driven financial market crash.
Then, the Rolls-Royce share price, like most, fell steeply. It made sense – after all, 41% of the business is made up of its Civil Aerospace division. Essentially, the more planes fly, the more this division earns. It’s no surprise, then, that its share price nose-dived as this income stream dried up.
But unlike many others, it has since struggled to regain that lost ground.
Are its headwinds declining?
As the world slowly returns to something approaching normal, countries are finally opening their borders and pent-up travel demand is really taking off.
The International Air Transport Association reported that global travel was at 47% of pre-pandemic levels in ’21. And it forecasts this to rise further to 83% in ’22 before exceeding pre-pandemic levels in ’24.
This should be good news for Rolls-Royce. It has previously said it needs air traffic to reach 80% of pre-pandemic levels to return to positive cashflow in this area. If these forecasts turn out to be accurate, it will mean switching from a £172m loss back into a profit-making division.
A nuclear future for Rolls-Royce?
But Rolls-Royce is far more than just jet engines. As an innovative engineering company, it has some great plans to help the world in its energy transition to net-zero carbon.
For example, its electric plane the ‘Spirit of Innovation’ only just this year broke the speed record to become the fastest zero-emission plane in the world.
What I’m really interested in, though, is its Small Modular Reactors (SMRs). Traditional nuclear plants are large and costly – often fraught with funding and planning issues. SMRs offer a distinct advantage in being cheaper – and faster – to construct.
If the UK Government is serious about reducing its dependency on energy imports, then nuclear will need to play a part.
100% renewable energy simply isn’t feasible. Not least since National Grid will always require alternative sources to balance the intermittency issues renewables cause.
And indeed, the recent release of the UK Government energy strategy confirmed its support for nuclear, including SMRs.
This could really be a pivotal moment for Rolls-Royce to power ahead in this area.
However, there are reports that the government is also in talks with Last Energy. This US energy provider, backed by the venture capital firm Gigafund, is reportedly looking to invest £1.4bn across the UK.
That’s not a competitive threat to take lightly.
Is Rolls-Royce now a buy?
Overall, I’m very encouraged by the direction Rolls-Royce is taking. It seems a strong strategy, with support from the UK Government’s energy plans.
The big question for me is on execution capability, given its current financial position. That debt load and its constraints will remain a problem for a while yet.
But I’m strongly considering Rolls-Royce for a long-term hold position in my portfolio.
