Rolls-Royce (LSE:RR) shares have been extremely volatile over the past couple of years. Having built a substantial position in the company, I’m of the opinion that the current share price presents a very attractive buying opportunity to add to my holding. Let’s take a closer look.
My investment rationale
My main reason for buying shares in this jet engine and power systems manufacturer was the belief that it would recover at some point following a slowdown during the pandemic.
After all, the shares were trading near 700p before March 2020. At the time of writing, they’re trading at 85p.
Going forward, there are plenty of reasons why I’m optimistic about Rolls-Royce. Its civil aerospace segment continues to benefit from increased flying hours globally. For the first three months of 2022, this metric had increased over 40% year on year. Many airline companies, like IAG and easyJet, are reporting higher passenger capacity numbers. This can only be good news.
The firm is also working on a number of long-term defence contracts with militaries all around the world. The deal for the US Air Force B-52 engine programme, for instance, is slated to be worth over $2.6bn to the company.
It has also recently secured the sale of subsidiary ITP Aero for an estimated €1.8bn. This was part of the company’s plan to raise £2bn to see it through the worst of the pandemic. It has stated that the proceeds from the sale will all go towards paying down its debt pile. With net debt standing at £5.1bn, the subsidiary sale will take this down to far more manageable levels.
Getting the finances in order
In recent months, the share price has struggled to break above 100p, primarily because investors need more evidence that the firm is genuinely recovering.
I believe that evidence is already there. For the six months to 30 June, underlying revenue rose slightly from £5.2bn to £5.3bn year on year. In addition, although cash flow was still negative during this period, it improved by around £1.1bn. Net debt also declined slightly.
On the flip side, operating profit fell from £307m to £125m, demonstrating the impact of supply chain issues and the higher prices of raw materials. These issues remain a threat.
Overall though, the business expects underlying profit to improve markedly in the second half of the year as conditions continue to stabilise. The full-year guidance was left unchanged by the release of the half-year results.
This company has endured a torrid time over the past couple of years. However, I see great potential for growth. Having watched the share price closely for some time, I think that a purchase below 90p could prove to be great value for my portfolio. To that end, I’ll add to my current holding soon.
