It’s perhaps no surprise to see the Rolls-Royce Holdings (LSE: RR) share price still struggling for liftoff. The FTSE 100 company has failed to rally like many other cyclical UK shares as the continuing Covid-19 emergency keeps travel restrictions in place in many regions.
Rolls-Royce’s share price has advanced just 8% over the past 12 months. That’s significantly below the 15% rise the broader FTSE 100 has enjoyed in that time. But are UK share investors missing a trick by not buying in?
Why Rolls-Royce’s share price could fly
There are several reasons why Rolls-Royce could soar in the second half of 2021. These include:
#1: A fresh decline in Covid-19 cases as vaccine programmes continue. This would lead to airlines taking to the skies en masse again, allowing Rolls-Royce’s engines to start clocking up air miles again and brightening the long-term demand outlook for its hardware. Yesterday, Germany loosened curbs for travellers from several countries and it’s thought other European countries could follow its lead in the days and weeks ahead.
#2: Divestment activity continues. A banged-up balance sheet is one of the reasons why Rolls-Royce’s share price has failed to ignite. The engineer has previously said it expects net debt to balloon to £4bn by the end of this year. So it has to get busy with asset sales to repair investor confidence. Happily, the business said it was “progressing well on our disposal programme” when it last updated the market in May.
#3: Cost-cutting actions impress. News on disposals will be keenly watched when Rolls-Royce releases half-year financials on 5 August. So will details on the FTSE 100 firm’s planned £1.3bn worth of annualised cost savings (“good progress” has been made with cost reductions, Rolls-Royce recently said). Any positive news on either front could drive the company’s share price much higher.
All that said, there are clearly big risks to Rolls-Royce’s share price too. Perhaps the most obvious is the ongoing public health emergency and what this will mean for the reopening of the aviation industry.
Despite vaccine rollouts, the number of global coronavirus cases is again rising. The emergence of the Delta variant is responsible for this most recent uptick. And the outbreak of other variants since this particular edition became widespread is casting concern for the airlines — and by extension Rolls-Royce — for further down the line.
This is, of course, particularly dangerous for the FTSE 100 firm, given its enormous debt pile. Sure, August’s financials might show encouraging progress on asset sales and cost-cutting. But this will likely count for little if signs emerge that travel barriers are set to remain in place, or possibly even tighten.
The Rolls-Royce share price doesn’t look that cheap, in my opinion, given these dangers. The firm is expected to bounce back into profit next year. But, at a current price of 102p, it commands a high P/E ratio above 30 times for 2022.
I’m simply not prepared to risk my hard-earned cash on such an expensive and high-risk UK share.
Royston Wild has no position in any of the shares mentioned. 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.