The Rolls-Royce Share price may be set for take-off!

After an upbeat Civil Aerospace Investor Day, here’s why I think the Rolls-Royce share price could be set for take-off this year.

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Key Points

  • After a positive Civil Aerospace Investor Day, the Rolls-Royce share price could be set for take-off.
  • Margins and flying hours are increasing, with the firm expecting positive free cash flow in 2022.
  • With a staggering amount of debt to pay off, Rolls-Royce could be in a healthy position to start paying it off in 2024.

The Rolls-Royce (LSE: RR) share price has taken a huge beating since the pandemic. Its stock has collapsed by over 60% since lockdowns came into place. However, there were many positives to take away from the firm’s Civil Aerospace Investor Day. So, here’s why I think the Rolls-Royce share price could be set for take-off this year.

The engine room

Rolls-Royce’s civil aerospace division is its main revenue driver. The segment generated 41% of revenue in 2021. Of that revenue, 72% is attributed to large engines. It’s also worth noting that while Rolls-Royce generates a huge sum of revenue from engine deliveries, its value proposition comes from the aftermarket. This means it stands to earn more from servicing the engines it delivers. As such, higher flying hours mean more servicing, which results in higher service revenue.

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Thankfully for Rolls-Royce, there are plenty of tailwinds as travel demand picks back up. For one, flying hours are forecasted to increase in the medium term. Secondly, freight is anticipated to fly the most hours compared to business aviation and large passenger jets. Therefore, the FTSE 100 firm is expecting more shop visits. Not to forget, the incoming freighter version of the A350, of which Rolls-Royce has a 100% market share, will benefit from this tailwind.

Source: Rolls-Royce Civil Aerospace Investor Day Presentation 2022

Neo worries

Management didn’t address worries surrounding the cancellation of a chunk of Airbus A330neo orders, but I still remain optimistic. Based on the table below, Rolls-Royce stands to gain a lot more revenue from servicing engines than delivering them.

Engine TypeAirframeMarket ShareEngines in ServiceEngines on Order
Trent XWBAirbus A350100%764859
Trent 7000Airbus A330neo100%130550
Trent 1000Boeing 78733%604122
Trent 900Airbus A38048%1681
Trent 800Boeing 77740%1760
Trent 700Airbus A33060%1,1460
Trent 500Airbus A340100%920
Table source: Rolls-Royce Investor Presentation 2022 (Excludes Qantas order and A330neo cancellations)

Management mentioned its goal to service over 7,000 engines by 2030, a 30% uptick from the current number. The Airbus A330’s Trent 700 engine is Rolls-Royce’s most profitable engine. On the conference call, the board mentioned that the Trent 700 still has 40% of its flying hours ahead due to its low average age. With more service extensions and engine demand as well, more service revenue is to be expected in the future.

Source: Rolls-Royce Civil Aerospace Investor Day Presentation 2022

Things are looking up

It’s no secret that Rolls-Royce’s financials are a nightmare. The British firm has negative shareholders’ equity with staggering amounts of debt. Nonetheless, I have reason to believe that things are looking up. At the investor day presentation, CFO Arvind Balan guided the firm’s civil aerospace division to breakeven this year. This is in line with Rolls-Royce’s wider outlook when it released its Q1 trading update.

Source: Rolls-Royce Civil Aerospace Investor Day Presentation 2022

Additionally, the London-based firm is seeing higher operating margins. This is down to investments in digitalisation and a leaner production system which includes reuse of parts, as well as a reduction in overheads and R&D costs. Consequently, Rolls-Royce expects free cash flow to comfortably exceed operating profit. From this, I expect the company to be able to start paying off its debt in 2024.

Nevertheless, I am wary of the economic headwinds which could hit flying hours, and as a consequence, Rolls-Royce’s top line. That being said, management reiterated that economic headwinds have been accounted for in their projections. That being the case, I am closely watching Rolls-Royce, and may potentially buy shares once it’s able to settle its debt.

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John Choong has no position in any of the shares mentioned at the time of writing. 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.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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