Rolls-Royce (LSE: RR) has had a rocky week, kicking off with ‘freedom day’ Monday. Did the investment world rejoice after most UK Covid-19 restrictions were lifted? No, the stock market went into a brief tailspin instead. The Rolls-Royce share price was one of the day’s biggest fallers.
The aero engine maker has bounced back a bit since then. But we’re still looking at a share price slide over the past month and a half. It all seems to be due to fears of infection rates increasing again, with the UK breaking 50,000 cases in a single day for the first time since January.
The Delta variant is ripping through populations, far more rapidly than its ancestors. And the longer people remain grounded, so do aeroplanes. And Rolls-Royce’s business pains continue.
Rolls has raised a lot of new finance to get it through the crisis, boosting its 2020 liquidity with £7.3bn in new debt and equity. If that keeps the company going until it returns to profit, I reckon it should do fine. And it might even be a good investment now.
Rolls-Royce share price prospects
But I am convinced the Rolls-Royce share price in 2021 will depend on seeing signs of those profits getting closer while a decent cash pile remains. And if it looks like there are going to be any delays to the firm’s expectations, we could see the shares dip further. But what are those expectations?
Back in March, when reporting 2020 full-year results, Rolls gave us a clue. It told us its is aiming for “free cash flow to turn positive during second half 2021 and at least £750m as early as 2022.” Quite how much free cash flow Rolls expects this year is not clear. But that hoped-for £750m figure for 2022, while welcome if it comes off, is not earth-shatteringly huge. Not for a company that recorded a free cash outflow of £4,185m in 2020.
It’s been a long time since those results. And we’ve had a few false starts regarding air travel. All that red, amber, green stuff was supposed to simplify things. But the constant changing has sown nothing but confusion. And we haven’t had as many people back to flying as I’d have thought this time last year, not by a long way.
Key date for shareholders
That makes 5 August a crucial date for investors’ calendars. It’s the day Rolls is due to deliver first-half results. And I reckon that could be the key factor in determining where the Rolls-Royce share price goes for the remainder of 2021. Many will be looking at the bottom line profit/loss figure, but not me.
I want to see only two things, starting with the liquidity situation. What will that say about the likelihood of the firm needing to tap the markets again for further funding? Secondly, what will the company say about its cash flow hopes?
For the share price to hold out for the rest of the year, I think we’ll need positive news on both fronts. But if that’s what we get, it could be a great time to buy.