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I’d buy Rolls-Royce shares despite the big 2020 loss

Nadia Yaqub
·3-min read
Plane on runway
Plane on runway

I’ve been bullish on Rolls-Royce (LSE: RR) shares for sometime. Last week the FTSE 100 stock released its 2020 full-year results and I can’t say I was too surprised with what the company reported.

I think most of the bad news is out in the open for Rolls-Royce shares. And from here, the company and share price are likely to recover so I’d buy the stock. But here’s what I drew from its recent results.

Big hit

2020 wasn’t a great year for Rolls-Royce. Revenue and profitability took a big hit. In fact, total sales were down 24% to £11.8bn. The company also suffered a £4bn loss over the year, which included a £1.7bn finance charge.

To be honest, I’m not shocked by the big negative numbers. Investors knew Rolls-Royce’s situation was struggling last year and understandably so given the pandemic. It’s no surprise to me that the Civil Aerospace division suffered the worst impact. Rolls-Royce’s largest business took a nose-dive because of Covid-19 travel restrictions. Its revenue just dried up, which was reflected in the results.

But I’ll stop with the negative news now and turn to the reasons why I’d buy Rolls-Royce shares.

Liquidity

Last year, Rolls-Royce took big steps to improve its liquidity position. It raised money through a rights issue and put further credit facilities in place.

So at the end of its 2020 financial year, Rolls-Royce had access to a grand total of £9bn in liquidity, including £3.5bn in cash and £5.5bn in undrawn credit. It expects a cash outflow of £2bn in 2021. This is weighted towards the first half of the year before Rolls-Royce expects cash flow to turn positive at some point in the second half of this year.

What I take from this is that the company has enough money to weather the storm in the short term. By my calculations, there’s a wiggle room of £7bn in liquidity provided that things continue as expected.

Power Systems & Defence divisions

The Power Systems and Defence divisions held up well last year. Both businesses accounted for 23% and 29% of Rolls-Royce 2020 full-year revenue respectively.

I’ve mentioned this before, but the Defence business provides Rolls-Royce with some revenue stability and visibility. So I’m not surprised, given that revenues took a hit in 2020, that the Defence division accounted for a larger portion of sales. In 2019, this same division only accounted for 20% of revenue.

What I think is pleasing to see is that the Defence business has 90% order cover for 2021. The company also predicts steady growth from this division into the medium term.

My view

Rolls-Royce is highly dependent on the lifting of travel restrictions and the vaccine rollout. Any delays or setbacks mean a further impact to revenue and profitability. This could also place pressure on liquidity and it may need to raise more money, which would be negative for the shares.

I recognise that the recovery from the pandemic will take time and I don’t think the dividend will resume any time soon. But I’m still optimistic about the prospects for Rolls-Royce shares. I think the worst is over for the company and hence I’d buy now.

The post I’d buy Rolls-Royce shares despite the big 2020 loss appeared first on The Motley Fool UK.

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Nadia Yaqub 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 2021