News & Analysis

Rolls Royce shares at 5-day high as cash savings pay off

Andrew Saks, Wednesday, 28 July 2021

Rolls Royce. The absolute epitome of British engineering excellence which is synonymous with the evergreen elegance of commercial flight and the equal allure of luxury cars.

Whilst the elevated social status of the discerning connoisseurs for whom only a Rolls Royce will do exudes imagery of 'old money' stability and alludes to the unflappable establishment of the upper classes, it still has to be run as a business, and at times during which air travel has been severely restricted and the climate zealots are banging an increasingly loud drum, sitting back whilst the orders roll in is not an option.

Rolls Royce stock, listed on the London Stock Exchange, recently dropped below £1 per share, however it has been climbing steadily this week and is now at a 5-day high, with analysts following its moves closely, and eager to share their opinions.

Even as recently as a day ago, there was a degree of clamor from within the realms of the analysts that considered what may happen if another lockdown is implemented, which would mean less planes in the air due to travel restrictions, under which circumstances Rolls-Royce would continue to lose revenue on its maintenance contracts as these are dependent on airtime.

Interestingly, aircraft engine maintenance contracts are a significant contributor to Rolls Royce's revenues, as the manufacturing of aircraft engines is so cost-intensive that the company pretty much breaks even on the sale of engines but structures its business model toward maintenance contracts.

Rolls Royce stock has risen 3.8% since the market opened this morning, which is quite a substantial move for a firm which is involved in traditional manufacturing, and which relies on a customer base that is being heavily impacted by unpredictable lockdowns.

It would have been a great shame indeed to have seen Rolls Royce go into administration, something that was a very real possibility during 2020, however the company has managed to pull itself back from the brink and is now on the road to recovery.

Rolls Royce's balance sheet looks a lot healthier now when compared to last year, and the threat of bankruptcy is no longer in sight. This is mainly because the company secured £7.3m in additional liquidity in 2020, plus there are a lot more road cars being sold.

Of course, it costs a lot of money to develop road cars, and Rolls Royce is a small, premium player in a world dominated by massive global corporations with enormous R&D budgets, however when I first saw London 30 years ago at the beginning of my career, I would occasionally marvel at the rare sight of a then-new Silver Spirit or a well-kept 1970s Silver Shadow wafting through Knightsbridge, and would remember that sight for years.

Now, London is awash with new Rolls Royce models. Every street in Central London appears to have at least one Rolls Royce adorning it, and they are almost ten-a-penny in the secure underground garages of apartment buildings and offices across the Capital.

This of course means that Rolls Royce is doing better in its home market than ever, despite Britain being hampered by a massive recession, however despite the proliferation of new Rolls Royce models bringing revenue to the company, it must be remembered that it costs a fortune to develop and manufacture cars, especially when scaling up and producing more than in many years previous.

Share prices are at the 102p mark today, which is healthy indeed. Let's hope that for many reasons, as well as this, there is no lockdown in the future, as not only would that be catastrophic for pretty much everyone, but Rolls Royce's ideal situation of turning cash flow positive would become a nothing more than a pipe dream.

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