UK Markets closed

Contracts galore! Should I buy surging Rolls-Royce shares for growth?

Abstract 3d arrows with rocket
Abstract 3d arrows with rocket

Since mid-October, Rolls-Royce (LSE:RR) shares have jumped over 30%. I have been tracking the beaten-down engineering giant for signs of a trend reversal. The aviation industry is recovering steadily, which has triggered a host of new contracts for the firm. Some of its more recent ventures are also witnessing steady growth.

Here, I will look at the finances, share price, and recent developments at the firm to judge if the shares hold enough value to earn a place on my growth portfolio moving forward.

Return of flight care contracts

A vast majority of Rolls-Royce’s pre-pandemic revenue came from flight engine upkeep contracts. With flights grounded for over 24 months, most TotalCare packages were cancelled. But this year, the firm has seen a marked increase in new service agreements.

Last week, the FTSE 100 company signed a five-year TotalCare contract with China Eastern Airlines for 10 Trent 700 engines. The firm also secured similar contracts with Malaysian Aviation Group and Air China in September. While this is still not close to pre-pandemic numbers, I see it as a definitive sign of a rebounding airline industry.

In a recent update, Rolls-Royce stated that, as of 30 October, large engine flying hours hit 65% of 2019 levels and rose 36% since October 2021. If this recovery is sustained, the company expects revenue growth next year through these upkeep contracts.

Power and defence

The energy crisis has accelerated renewables development. Rolls-Royce has been identified as a key provider of nuclear power in the UK and is also helping industries transition to better electricity storage units.

The firm’s line of mtu engines, power packs, and generators is seeing wide adoption across industries worldwide. Rolls-Royce recently secured a contract to power the largest supercomputer facility in the Middle East. The company has also provided 200 mtu generators to become the UK’s leading provider of critical power solutions. The 3.5 gigawatts output powers data centres, telecom, and healthcare industries in the UK.

On the defence side, Rolls-Royce has signed a deal with the U.S. military valued at US$1.8bn to service engines for U.S. Navy aircrafts. Rolls-Royce will also provide 500 mtu engines for the UK’s Boxer armoured vehicle and 16 gensets for the German navy.

Concerns and verdict

All these positives make me bullish on the Rolls-Royce share price at 84p, given that its pre-pandemic high was close to 350p. But I have to look at how the company can navigate some of the concerns as well.

Rolls-Royce acquired significant debt during the pandemic period. However, the board managed to complete the sale of its ITP Aero division to help the firm repay a £2bn floating rate loan by 2025. The remaining £3bn debt will continue to eat into future revenue but the recent positive development is encouraging.

Sky-high energy prices could increase flight ticket prices, further pushing back recovery. And this could prove to be a strong blow for the firm. I will be tracking this over the coming months closely.

But I do see value in Rolls-Royce shares at the moment as all its target markets are recovering. I think it has the order book and market share to navigate some turbulence. Barring any huge negative developments, I would consider a £10,000 lump sum investment in Rolls-Royce shares when I expand my portfolio next.

The post Contracts galore! Should I buy surging Rolls-Royce shares for growth?  appeared first on The Motley Fool UK.

More reading

Suraj Radhakrishnan 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.

Motley Fool UK 2022