Why is Rolls-Royce back on the rise?

Aerospace and defence group Rolls-Royce’s shares received a boost after it expressed confidence in solving its expensive, long-drawn engine problems.

  • Rolls-Royce Holdings PLC (LSE: RR) share price hits £104.98 per share on Tuesday (06 July 2021)
  • The company is optimistic that its engine issues will be fixed this year
  • Analysts are targeting the stock to climb to £113.67 in the coming year
  • Rolls-Royce has also deepened a partnership with Shell
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Rolls-Royce stock price: What’s the latest?

British engineering company Rolls-Royce shares have rallied as much as 4% since the company said it would be able to fix its engine issues last Friday (02 July 2021).

Year-to-date, the London-listed RR stock is up 1.6%, after sliding 53% last year as the aviation and aerospace sectors were hit by the Covid-19 pandemic.

As of Tuesday, 10 out of 20 analysts recommended ‘hold’ on RR shares, six rated ‘sell’, while four said ‘buy’. Their average 12-month target price was £113.67, Bloomberg data showed. That implied a potential upside of 8.3% based on Monday’s closing price.

Over the past week, Vertical Research Partners recommended ‘hold’ with a £120 target, and Morgan Stanley gave an ‘equal weight/in-line’ rating while eyeing £106 per share.

Bloomberg Intelligence (BI) analysts wrote that Rolls-Royce’s £5 billion debt-and-equity raise buys the UK firm time to weather the pandemic, ‘as worsening credit metrics hang heavily over spreads’.

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Rolls-Royce optimistic about engine matters

Last week, a Rolls-Royce executive said the company is hopeful that it can soon resolve its costly jet-engine issues, Bloomberg reported. The news boosted its shares by 4.1% across two days.

Final fixes to a string of glitches relating to the Trent 1000 turbine that powers Boeing Co’s 787 Dreamliner wide-body plane will likely be made in 2021, Rolls-Royce engineering and technology director Simon Burr told Bloomberg in an interview.

Issues with the engine have drained the group of huge sums, which will likely exceed £2 billion by 2023, and have affected Rolls-Royce’s relationships with major customers, according to Bloomberg.

'After a difficult three or four years, I feel confident about the durability of the engines and the future,' Burr said.

He added that the group is testing the high-pressure turbine blades, which were deteriorating more quickly than expected.

Jefferies analyst Sandy Morris, who has a ‘buy’ call and a £130 target on RR shares, noted that the downtime during the pandemic has given Rolls-Royce the capacity to test both the Trent 1000 and Trent XWB ‘far more intensively’. However, Morris believes ‘the real test will come when the engine fleet is working hard again’.

With travel curbs now easing, 60-70% of 787 Dreamliner jets are active, while around 90% of Airbus SE’s A350 airliners, which use the Trent XWB engine, are active, Jefferies estimated, adding that the full wide-body fleet could return to service by the middle of next year.

Meanwhile, BI analysts recently opined that the group ‘must focus on right-sizing its civil aviation business’ in order to preserve cash.

Separately, Rolls-Royce last week inked a memorandum of understanding with oil major Shell to develop sustainable aviation fuel (SAF).

The partnership is in line with both companies’ plans for net-zero emissions by 2050.

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