It has been an extremely challenging 18 months for Rolls-Royce (LSE: RR), with the pandemic causing absolute havoc, especially in the civil aerospace division. This has seen the company incur very large losses, and the Rolls-Royce share price even dropped to below 40p at one point. But with the country starting to return to normality, there is some hope that the business can recover. At over 100p, should I therefore be buying this FTSE 100 stock now?
The year of 2020
It’s fair to say that the majority of UK companies struggled during 2020. Nonetheless, due to its ties with the aviation sector, Rolls-Royce was one of the biggest strugglers. This was confirmed in the company’s full-year trading update, where it reported a loss of over £3.1bn. Such a large loss included the effects of impairment charges, restructuring costs, and lower revenues.
To survive, the firm had to take drastic measures. For instance, at the end of October last year, the company managed to raise £2bn through issuing nearly £6.5bn new shares. Due to the dilution of shares, this caused the Rolls-Royce share price to fall by around 64%. It also limits the likelihood of the share price returning to its pre-pandemic prices, unless the company is in the financial position to buy back some of these shares. There is no possibility of this happening for a long time.
On the flipside, this secondary offering of shares, alongside debt issuances, did manage to strengthen liquidity to £9bn. This included £3.5bn in cash and £5.5bn in undrawn credit facilities. The company also hopes to reach £1.3bn in annual cost savings by the end of 2022. All of this means that I am confident the company will survive, and it reduces the risk of investing. This is one reason to buy shares as a recovery stock.
Of course, with international flights still far below 2019 levels, Rolls-Royce faces a number of challenges. The high number of global coronavirus cases at the moment therefore remains an extremely pressing issue. Despite this, the company still hopes to start generating cash again at some point during the second half of this year.
It is also important to recognise that the Rolls-Royce business has more to it than just its civil aerospace division. Indeed, last year, its defence sector accounted for 29% of the firm’s revenues. It also had underlying operating profits of £448m. As such, I believe this sector could have a positive effect on the upcoming half-year results, which may see the Rolls-Royce share price gain further momentum.
Can the Rolls-Royce share price rise further?
I feel that the Rolls-Royce share price is still in for a very turbulent 2021. Clearly, the civil aerospace division will carry on struggling, and losses look set to continue for the foreseeable future. There is also no proposition of any shareholder returns until at least 2023. As such, while I feel there is some upside potential, and bankruptcy does not seem likely, there are still too many problems with the company for me to invest.
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Stuart Blair 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.