Rolls-Royce share price: what's next after flying back into profit?

• Rolls-Royce (LSE: RR) share price falls to 109.08 pence per share on Monday (09 August 2021)
• It returned to profitability for the first six months of this year
• The engine maker said it is on track to meet its 2021 forecasts
• Interested in trading Rolls-Royce shares? Open an account with us to get started.

Could Rolls-Royce shares rise further?

Shares in Rolls-Royce, whose engines power long-haul planes, lost some momentum on Monday, after soaring late last week. The RR stock finished 3% lower day-on-day at 109.08 pence on the day.

It had jumped 5.9% last Thursday to a more-than-one-month high of 110.68 pence thanks to a surprise profit and positive earnings outlook, making Rolls-Royce the top gainer of blue chips.

The British engineering company’s shares gained another 1.6% to close at 112.42 pence on Friday.

Out of 21 analysts, five gave ‘buy’ calls on RR shares, 10 recommended ‘hold’, and six said to ‘sell’ as of Monday. Their 12-month target prices averaged 114.63 pence per share, Bloomberg data showed.

Bernstein on Monday gave an ‘underperform’ recommendation alongside a target of 96 pence. Last week, research teams that suggested ‘hold’ included Deutsche Bank with a 116-pence target, Morgan Stanley with a 106-pence target, and Investec with a 100-pence target. Societe Generale said to ‘sell’, while eyeing 100 pence per share.

Several experts see the RR stock as a ‘strong medium to long-term prospect’, given that its share price has fallen to less than one-third of the 2018 peak, Reuters reported.

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What is the outlook on Rolls-Royce?

The UK aircraft-engine maker was back in the black for the first half of this year.

It also said it was on track to meet its forecasts for 2021, with cost reductions and asset sales helping to tide it through a gradual recovery in long-haul travel.

However, Rolls-Royce flagged that its 2022 goals could be delayed, as flying hours did not rebound quickly enough. The group had earlier expected to reach free cash flow of £750 million as early as next year. ‘The exact rate and timing of return is out of our control,’ said Rolls-Royce CEO Warren East.

Underlying operating profit stood at £307 million for the first half, reversing from a £1.63 billion loss in H1 2020. Underlying revenue dipped 3.4% to £5.23 billion, from £5.41 billion in the year-ago period.

Rolls-Royce’s resilient defence unit, which makes engines for military jets and powers nuclear submarines, buttressed the group’s 1H 2021 performance. Also helping was a recovery in the power systems arm.

Civil aviation, Rolls-Royce’s largest business unit, had seen revenues nosedive last year as airlines stopped flying during the Covid-19 pandemic.

Key to its financial recovery would be raising £2 billion from asset disposals, Reuters reported. Rolls-Royce last week announced it was in exclusive talks with a buyer for its Spain-based ITP Aero unit, for a reported 1.6 billion euros.

The company maintained its guidance for free cash outflow to improve to £2 billion this year, and for cash flow to turn positive in 2H 2021.