No company encapsulates the devastating impact of the pandemic on businesses as well as Rolls-Royce (LSE:RR). The absence of civil aviation for nearly two years wreaked havoc on the engineering firm. And its stock has been struggling since. But despite the decline, I think Rolls-Royce shares still hold incredible value.
While I am willing to overlook a few holes in its balance sheet, I also know that many strong businesses have collapsed during tough economic periods. Here, I will look at the Rolls-Royce share price in detail to judge if the business is worth investing in before 2023.
Can aviation boost Rolls-Royce shares?
Currently, the UK economy is under swirling clouds of uncertainty. The country is grappling with a huge energy crisis. In fact, reports show that the UK’s energy crisis is the worst in Western Europe. All of this has impacted how investors are looking at the market.
This also has put an immense strain on businesses, including Rolls-Royce. The firm’s return to profitability in 2021 was a positive marker for investors. However, this already seems to have slowed down over 50% in the first half (H1) of 2022 with just £125m in profits.
The silver lining here is the return of air traffic. Rolls-Royce has already seen a spate of deals for its profitable engine upkeep business. Just today, a new venture with Air China to overhaul and maintain its sizable fleet was signed.
While the latest crash in the Rolls-Royce share price is triggered by the health of the UK economy as a whole, the engineering firm is slowly looking to reverse recent fortunes.
The big reason why I am still slightly bullish on Rolls-Royce is because of the smart restructure. And the areas it’s exploring now have me buzzing.
Energy and defence are a huge focus for the firm going forward. The invasion of Ukraine has derailed the energy sector and has countries in the region scrambling to improve defences. This has boosted both industries tremendously.
And Rolls-Royce is set to play a big role in both. The firm’s small nuclear reactor project was given the green light by the UK government. The power systems division has seen its order book grow by 53% to £2.1bn. The second quarter (Q2) of 2022 especially saw a huge spike in sales.
The other booming area for Rolls-Royce is defence. The company recently signed billion-dollar deals with the US, UK and German militaries. It holds a vast £6.5bn order book, which includes an 11-year contract to support the Adour engine, which powers UK’s Hawk jets.
Concerns and verdict
Despite the large order books, profit margins have been falling. Its booming defence wing saw underlying profits fall 32% to £189m compared with H1 2021. The power systems also took a step back. H1 2021’s positive cash flow of £71m was reversed this year, with the sector bleeding out -£76m in H1 2022.
The board chalked this up to high demand, increasing costs and supply chain challenges. But I think these figures will get worse thanks to rising commodity prices.
There is no denying the intrinsic value of Rolls-Royce shares at 77p. But right now, given the turbulence in the UK, I am waiting for 2022’s full-year reports before investing in Rolls-Royce shares.