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Why the Rolls-Royce Holdings (RR) share price rose 10% in 2021

Rolls-Royce's business aviation engine, the Pearl 700

The Rolls-Royce (LSE:RR) share price was 112p at the start of 2021. It finished the year 10% higher (9.71%, more precisely)  at 122.88p. In 2021, the shares traded as low as 87p and as high as 147p.

While the pandemic and Rolls-Royce’s response to the crisis explain a lot of the moves in the company’s share price, only considering 2020 onwards ignores essential points about the Rolls-Royce story. However, it’s an excellent place to start.

Rolls-Royce shares started 2021 poorly

The pandemic hurt Rolls-Royce as it generates a good chunk of revenue monitoring and servicing the engines it supplies for aircraft. If aircraft are not flying, the billable service hours drop. Rolls-Royce reported a £4bn underlying pre-tax loss for the 2020 fiscal year compared to a £583m profit in the previous year. A £5bn rescue package was announced in early October to help prop the company up. This included a £2bn rights issue, £2bn bond sale, and a further £1bn in other loans. These measures will dilute shareholder returns for years to come. Rolls-Royce shares slumped to 40p in October 2020.

A more optimistic outlook about the pandemic helped Rolls-Royce shares climb from October onwards. However, the emergence of the Delta variant was a headwind in late 2020 and early 2021. In March 2021, the Norwegian government blocked the sale of a Rolls-Royce owned engine business, which would have contributed to a planned £2bn asset sale to further shore up the company’s balance sheet. March 2021 was also when those 2020 losses became official. Rolls-Royce shares drifted back to 87p in July 2021.

As summer 2021 rolled around, international travel was starting to pick up again. Vaccine programmes were a success. The pandemic outlook had again improved. Rolls-Royce defence and power generation businesses were doing well and helping to support the as yet unrecovered civil aviation business. An underlying operating profit of £537m for the first half of 2021 was reported compared to a loss of £1.6bn in 2020. Rolls-Royce also made headway with its small modular nuclear reactor (SMR) project. The company’s share price moved higher, hitting a 2021 high of 150p in November.

2022 and beyond

Another coronavirus variant, Omicron, emerged towards the end of 2021. Again, this caused investors to sell so-called “re-opening” stocks like Rolls-Royce. So, Rolls-Royce finished 2021 a little off its year’s high at 123p. It is safe to say that the end of the pandemic, particularly air travel getting back to normal, will be positive for Rolls-Royce as it generates around half its revenues from this.

However, Rolls-Royce cannot blame all its current woes on the pandemic. Its margins have been worsening since 2015. Problems with its Trent 1000 engines, which are now resolved, predated the pandemic. When the industry pivoted to slimmer planes, a decision to concentrate on wide-body aircraft engines was a strategic misstep.

Still, travel will eventually get back to something close to its pre-pandemic levels. Rolls-Royce is introducing more narrow-body engines. It has managed to sell off unwanted businesses, and the SMR project looks interesting. 2022 might be a brighter year for Rolls-Royce; after all, it could hardly get much worse than 2020 or the first half of 2021.

The post Why the Rolls-Royce Holdings (RR) share price rose 10% in 2021 appeared first on The Motley Fool UK.

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James J. McCombie does not own shares in any of the companies mentioned in the article. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.