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Rolls Royce shares grounded, but will fuel innovation offer hope?

The Rolls Royce share price remains bearish, but a low-emission breakthrough could fuel a change in fortunes. However, with Covid-19 threatening to keep flights grounded, Rolls Royce shares remain at their lowest point in 2021.

  • The Rolls Royce share price is down 12.5%
  • Covid-19 restrictions could keep bear run going
  • Will new low-emission innovation fuel an upswing?

Shares in Rolls Royce (RR.L) have dropped 12.5% this year. January’s bear run saw the company’s share value fall from 104p to 91p between 4 January and 29 January 2021. There has been a brief rally this week, however. Shares opened at 96p today (2 February 2021) but are yet to break the 100p mark.

This suggests that pessimism still persists. Much of the current sentiment is due to ongoing travel restrictions. Rolls Royce, which required a £5 billion rescue refinancing plan in 2020, said it expects to burn through £2 billion in cash assets this year.

Will Rolls Royce shares continue to drop with flight times?

Executives expect engine flying hours to be down 55% on pre-pandemic levels. This lack of time in the air, on which Rolls Royce is so dependent, means expenditure will be higher than expected. City analysts had previously predicted that the cash burn would be between £1 billion and £1.5 billion. With the company’s 26 January 2021 update showing that losses could be double those figures, Rolls Royce shares dropped 9% for the week, and 12.5% for the month.

The impact of Covid-19 is unlikely to wane any time soon. However, analysts are beginning to alter their forecasts. A survey of 16 analysts by the Financial Times shows a majority have set their predictions to either buy or hold. The median Rolls Royce share price target is now 96p, with a high of 157p. Fuelling this apparent change of opinion is the company’s advances in sustainable fuel.

Could innovation fuel a share price reversal?

For Rolls Royce shares to rebound, mass commercial travel needs to return. Vaccine rollouts across the world are making this a more realistic possibility by the day. However, with new strains and a general air of fear gripping large parts of the population, it may be some time before people are flying freely. Until then, Rolls Royce is plugging the gap with innovations and military contracts.

Rolls Royce carried out the first full test of its sustainable aviation fuel (SAF) this week. The test took place in Germany on the new Pearl 700 business jet engine. Dr. Joerg Au, the chief engineer on the project, called it a successful first step in 'enabling customers to achieve net zero carbon emissions'. As well as pioneering the next generation of low-emission fuel, Rolls Royce recently won a $72.9 million contract to modify 22 Osprey engines for the US military. However, it remains to be seen whether or not these efforts are enough to help the Rolls Royce share price reverse its recent downswing and become buoyant in 2021.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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