The Rolls-Royce (LSE:RR) share price is currently at 81p. This reflects a fall of 17% in the past year, with it trading below 100p for well over a month. However, with new information via a recent trading update, what could be the catalyst for the share price to get back above this psychologically critical level?
Maintaining a hold on civil aerospace
As far as the first four months of 2022 have gone, trading has been in line with expectations. This doesn’t provide me with a huge amount of optimism, but then again it’s only a few months that we’re talking about. I think for the Rolls-Royce share price to make the material move back to 100p, we’d need to see the successful outcomes of the strategy transformation.
There are some ideas around this that were shared at the investor day last week. For example, management said that it’s well positioned to outperform market growth. It used as evidence for this the percentage share of service it has in different aircraft sectors. Impressively, it has 88% of share in business aviation, and 58% of aircraft with new-generation large engines.
Clearly, the business does have a solid presence in the civil aerospace sector. So if we see a post-pandemic boom in this area, the Rolls-Royce share price should be able to benefit from this. In terms of targeting the 24% growth needed to reach 100p, I think this could be realistic. In the latest full-year results, civil aerospace contributed 41% of the group revenues. So if this area returns to profitability in the coming year, it could provide a tangible uplift to overall earnings and share price growth.
Reducing liabilities to help the Rolls-Royce share price
Another point I think is key for the Rolls-Royce share price to get back above 100p is debt reduction. In the trading update, it mentioned the £2bn in total proceeds that is expected from the sale of ITP Aero. This will be used to help repay debt. Other disposals in this regard could also be used to get net debt to a much more manageable level.
In the full-year report, net debt was at £5.1bn, up £1.5bn from the previous year. This relates to the Rolls-Royce share price for two reasons. Firstly, the lower the net debt, the higher the value of the firm on paper. One way of valuing a business is simply assets minus liabilities. Debt is a liability. So lower debt increases the worth of a business and should lift the share price.
Second, high borrowings dampen investor sentiment. It certainly has been one reason why I’ve stayed clear of investing. It can mean that cash flow is used to pay interest, rather than to grow the business.
Given that the market capitalisation of the company is £7.09bn, a reduction in liabilities by £1bn to £3bn in the coming couple of years could easily help to push the Rolls-Royce share price beyond 100p.
Overall, I think that the above two factors are key in determining the direction for Rolls-Royce shares. As it stands, I’m cautiously optimistic> But I could be wrong and I want to see how things play out in coming months before investing.
