It’s been a rough three years for Rolls-Royce (LSE:RR.) shares. Following the pandemic, the engineering group saw its aerospace division collapse, leading to a massive restructuring to cut costs. This included the termination of 9,000 employees, the disposal of its non-core businesses to repay £2bn in loan obligations, and now a change in leadership.
With its latest trading update showing signs of recovery, is now finally the time to consider this company for my investment portfolio? Let’s take a closer look.
As challenging as the mass layoffs have been, the decision ultimately led to an annual cost saving of £1.3bn. This, combined with the proceeds from previously mentioned non-core business sales, has undoubtedly fixed some of the cracks in the firm’s balance sheet.
As of 31 October 2022, the company has roughly £2bn in cash with access to a further £5.5bn from creditors. Its debt balance is still substantial, standing at £4bn. But the good news is all of it is fixed. Therefore, rising interest rates aren’t applying any pressure on its existing loans. And since only £1.2bn worth matures before the end of 2025, management has some breathing space.
Its civil aerospace division continues to report increased flying hours, back to 65% of 2019 levels, with expectations of accelerated recovery once the travel sector in Asia improves. Meanwhile, its defence and power systems divisions seem to be firing on all cylinders with new contracts and strong order books.
Needless to say, this all sounds quite positive for Rolls-Royce shares.
Change of leadership
Despite unveiling the company’s turnaround strategy, CEO Warren East isn’t executing it. In fact, since the start of 2023, the corner office is now occupied by Tufan Erginbilgic, and he had quite a brutal message to employees about the state of the business: “Every investment we make, we destroy value… we underperform every key competitor out there.”
Obviously, that’s not exactly what shareholders or employees want to hear. So should investors steer clear of Rolls-Royce shares? Well, not necessarily.
In my experience, new leaders often point out all of the problems — after all, they haven’t been responsible for them. They get lots of kudos when the business naturally recovers. In other words, under-promise and over-deliver.
Whether Erginbilgic can turn the business around has yet to be seen. He has a background in the energy sector, which bodes well for the firm’s mini-nuclear reactor business. But whether that will suffice in managing the aerospace and defence divisions effectively, only time will tell.
Time to buy Rolls-Royce shares?
Personally, I’m always wary of new leaderships. There are plenty of examples of CEOs stepping in with a grand new plan only to put the business in a worse state and then walk out the door.
The improving financials is an encouraging sign. And I’m optimistic that the worst is now far behind. But much work remains to be done to restore Rolls-Royce shares to their former glory. Therefore, even at 108p, I’m keeping the company on my watchlist for now.
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Zaven Boyrazian has no position in any of the shares mentioned. 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.