Rolls-Royce (LSE: RR) has suffered a calamitous year in 2020. In the short term, a doubling in its share price wouldn’t make a huge amount of difference. I expect a lot of volatility in the coming months too, and I wouldn’t be surprised to see the Rolls-Royce share price achieve a 100% spike multiple times and then fall back again.
What I’d really like to see is a sustainable doubling, as part of a long-term recovery. I like Rolls-Royce as a company. It’s been well managed for decades, and has a business with an unusually clear view of future income. Or, at least, it did have until the Covid-19 pandemic struck. The visibility of Rolls’ earnings depends on planes actually flying. And they’re mostly not.
The company does, I think, look like it will survive. In its most recent update this month, Rolls reminded us of its “£5bn package completed in November to increase resilience, strengthen the balance sheet and support long-term strategy“.
At the same time, the firm told us it expected a free cash outflow of approximately £4.2bn for 2020. That should lead to year-end net debt of between £1.5bn and £2bn. That’s a lot to have hanging over the Rolls-Royce share price. But it hopefully shouldn’t be too dangerous, with expected liquidity of £8.5bn to £9bn.
Rolls-Royce share price under pressure
So, there’s plenty of cash to keep the lights on for a while. And Rolls is working hard on a cost-saving programme. But while there’s so very little cash coming in, there’s still huge uncertainty over how long that liquidity will last.
The roll-out of the Covid-19 vaccine should help, as that’s going to get more people flying again. But the bullish response to those successful trial results in November does look to have been a bit premature. There’s still some way to go between having a vaccine approved and everyone getting their jabs. It’s likely to be months yet before we’re all safe. And that’s assuming there will be no virus mutations that hinder the effectiveness of the vaccine.
I don’t expect the Rolls-Royce share price to do much until we see a return of positive cash flow. At that stage, I’ll start to believe that no further bailout will be needed. And that existing investors won’t see their holdings diluted any further. But when might it happen?
When will cash flow return?
In the same December update, Rolls-Royce said: “We expect to turn cash flow positive at some point during H2 2021.” The company added that it’s also targeting “at least £750m free cash flow (excluding disposals) as early as 2022 and at least £2 billion from disposal proceeds“.
That cash flow target for 2022 is ambitious, and I wonder if it might be a bit too stretching. I suspect others do too, as the Rolls-Royce share price has continued to drift downwards since the update. But I don’t see it as the key aim right now.
No, that surely has to be the cash-flow-positive point. But “some point during H2” is still laden with uncertainty. Could it be July? Or might it not be until December? If it comes sooner rather than later, I could see it underpinning a share price revival. Will the shares reach twice today’s levels and stay there? I think there’s a decent possibility.