The Rolls-Royce (LSE:RR) share price has been through a tumultuous 24 months. The travel sector was hit badly in 2020, dropping shares of the aero-engine manufacturer below 100p for the first time since 2005. Despite signs of recovery, recurring Covid fears have stalled its rebound.
But I think 2022 could be a turnaround year for the FTSE 100 company if a few variables turn favourable. Here’s why I think now is the last chance for me to capitalise on the dirt-cheap Rolls-Royce share price before a potential surge in 2022, which is possible under the right circumstances.
Highly anticipated results
Rolls-Royce’s annual results are set to be released on 24 February. Shareholders will expect a positive showing and I think it is likely, given the steady improvements made across the three previous quarters.
The aerospace company was forced to raise funds in 2020 via bonds and grants. In 2020 Rolls-Royce recorded a £5.4bn loss and burned through its £4bn cash reserve by the end of 2020. Since then, the company has been restructuring operations by cutting nearly 9,000 jobs and shifting focus from civil aviation to its defence and power systems divisions.
This allowed the company to offload non-core assets for £2bn and cut down on its sizeable debt throughout 2021. The company is looking at £1.3bn in savings by the end of 2022 and I think this is possible after the company recorded positive cash flow in the third quarter of 2021. The board now expects free cash outflow in financial year 2021 to be better than the previous guidance of £2bn.
This is why I think full-year results are so important for the Rolls-Royce share price in 2022. A positive showing and further evidence of improving cash flow could bolster investor sentiment towards the aerospace giant.
Travel boom in 2022
Travel experts expect leisure travel to return to 80% of pre-pandemic activity in 2022 (currently at about 45%-55% depending on the region). This could be a huge boost for Rolls-Royce, given that civil aviation is still its largest wing. Also, improved cash flow from aviation could benefit RR’s transition into nuclear power and military technology over the next 10 years.
Covid has completely changed the way we think about work. Research suggests that young professionals now value leisure and free time much more post-Covid. Four-day work weeks and remote working are now a lucrative options for many, which could promote spending on leisure and travel. The big question right now is will this eat into the lucrative business air travel segment over the long term?
In fact, travel restrictions remain the biggest concern surrounding the Rolls-Royce share price now. Further interruptions could decimate months of work overnight. This is why investors are nervous when it comes to travel shares now. This popular FTSE 100 company is trading at 119p today with a price-to-earnings ratio of three times. And despite the low valuation, its share price looks set for a prolonged recovery.
But, there are many positives to consider as well. The Rolls-Royce share price has been posting higher lows since October 2020 and returns stand at a whopping 205% since. I think the ideal conditions for a Rolls-Royce share price explosion in 2022 are if the travel market continues to rebound along with evidence of significant debt reduction and positive cash-flow in the full-year report.
Should you invest £1,000 in Rolls-Royce right now?
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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.
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