When it was feeling the financial squeeze last year, Rolls-Royce (LSE: RR) needed to raise cash and cut costs. Part of that was to refocus by disposing of non-core assets. We heard further news of that Wednesday though, as I write, the Rolls-Royce share price hasn’t really moved in response.
In the latest move, Rolls is selling Bergen Engines, its medium speed liquid fuel and gas engines business, to Langley Holdings. The deal is worth an enterprise value of €63m, funded from Langley’s cash reserves.
Rolls had previously tried to sell Bergen Engines to a Russian firm. But the Norwegian government stepped in to put a stop to it on security grounds.
Rolls told us the disposal will help towards its target of raising at least £2bn in disposals. It said: “Proceeds of €70m from the transaction together with €40m of cash currently held within Bergen Engines which is to be retained by Rolls-Royce, will be used to help rebuild the Rolls-Royce balance sheet in support of our medium-term ambition to return to an investment grade credit profile.”
That investment-grade credit profile target could be key. Once it reaches that point, future borrowing should become easier and cheaper to obtain.
Rolls-Royce share price not there yet
On its own, this total of €110m isn’t going to provide a turnaround point. And I’m not surprised the Rolls-Royce share price hasn’t responded more strongly. But the shares have been picking up steadily over the past few weeks. And the latest news comes just a day before first-half results. If the balance sheet is looking good on 5 August, this modest extra boost might just make an important difference.
There’s been other good news too, with air travel finally starting to show some meaningful progress. British Airways owner International Consolidated Airlines reckons it’s going to be back to around 75% of pre-pandemic capacity in the final quarter of 2021.
Still, I do understand if investors remain cautious. We have had a few overenthusiastic earlier false starts. And those share price pick-ups that never really got going in the past six months are there to remind us.
H1 results expectations
So what do I expect from H1 results? I’m really not interested in profit figures, which aren’t going to be good. No, I’ll be paying attention primarily to the balance sheet and what the debt situation is looking like. Then I’m hoping we might get some upgraded full-year guidance. In particular, any improvement in the cashflow situation would be very welcome. And it could give the Rolls-Royce share price a boost on the day.
Would I buy now? There are still economic risks ahead, and the Covid-19 Delta variant hasn’t gone away. So I’m still cautious over the aviation business for the rest of the year.
But I can’t help feeling the balance is swinging in favour of Roll-Royce now. It’s definitely one I’ll be watching closely as a possible ‘buy’ later in the year.