It has been a disappointing few years for those that own Rolls-Royce (LSE:RR.) shares.
Over the past five years, the share price has fallen by 65%. Since its peak in December 2013, the stock is down 76%.
Ignoring broker’s fees and stamp duty, £5,000 invested in January 2018 would now be worth £1,750.
Flying high?
The core business of Rolls-Royce has suffered enormously from the pandemic.
The majority of its revenue is still generated by its Civil Aerospace division. But, this has fallen dramatically since Covid-19 decimated the aviation industry. The company generates income based on the number of hours flown by the aircraft that use its engines.
| Year | Large engine flying hours (LEFH) |
| 2018 | 14.3 |
| 2019 | 15.3 |
| 2020 | 6.6 |
| 2021 | 7.4 |
There has been some recovery in 2022. In the four months to the end of October, LEFH were 65% of 2019 hours. But, the World Economic Forum does not anticipate air travel returning to pre-pandemic levels until 2024.
A further concern is the fall in the number of widebody engine deliveries.
| Year | Engine sales |
| 2018 | 469 |
| 2019 | 510 |
| 2020 | 264 |
| 2021 | 195 |
With the expected life of a well-maintained engine being 15,000 hours, a reduction in new engine sales will adversely affect revenue for years to come.
Encouragingly, Boeing‘s 787 Dreamliner has now received clearance to fly once more. Rolls-Royce will be required to deliver further engines once aircraft production is resumed.
Also, in November, it was announced that the company’s Defence division has renewed two five-year contracts worth £1.8bn.
Debt levels
The deterioration in the financial performance of the business, which saw cash fall by £6.6bn in 2020 and 2021, led the directors to embark on a debt-reduction strategy.
The company recently sold its ITP Aero business for £1.6bn, the proceeds from which were used to repay its £2bn UK Export Finance loan.
Its debt profile now requires £500m to be repaid in 2024, £700m in 2025, and £2.8bn between 2026 and 2028.
This should give the company sufficient breathing space to restore some of its liquidity, and possibly refinance its longer-dated debt.
A £1.3bn cost-reduction programme has also been concluded.
Furthermore, the company is able to mitigate the impact of rising costs through having inflation-linked pricing on many of its long-term contracts.
Going nuclear
In an attempt to diversify away from its core business, the company has recently started to explore the feasibility of manufacturing small nuclear reactors.
These have the advantage of being built far more quickly than conventional power stations. The intention is to make these modules in a factory, before assembling them on-site in 500 days.
But, the first reactor is not expected to generate power until 2030.
Too much turbulence for me
Although I’m confident that Rolls-Royce is on the path to recovery — free cash flow is expected to be positive in 2023, and the company is profitable once more — I don’t want to invest at the moment.
The company has a great reputation for high-quality engineering, but demand for its products is largely outside of its control. I also wonder whether increased working from home means business travel will ever recover.
Also, the absence of a dividend (it was suspended in 2020) leads me to conclude that there are currently other more attractive opportunities in the FTSE 100.
