Rolls-Royce investors benefit as share price recovery picks up pace

The opening up of transatlantic flights and a funding deal for next-generation power reactors have helped Rolls’ share price break a price ceiling. Graeme Evans explains.

Rolls-Royce (LSE:RR.) shareholders who took up their rights in the engine giant's £2 billion cash call almost exactly a year ago are sitting pretty after another 5% rise in shares today.

The widely held stock briefly broke the 150p barrier for the first time this year, as Rolls unveiled a funding deal for the small modular reactors business that it expects will bring the next generation of low-cost, low-carbon nuclear power technology.      

The breakthrough came a day after the US border reopened to fully vaccinated European travellers, providing a long-awaited boost to Rolls’ engine flying hours as carriers including British Airways ramp up transatlantic capacity in response to pent-up demand.

Other recent landmarks driving the share price recovery have included the deal to sell ITP Aero for 1.7 billion euros (£1.45 billion), which is part of chief executive Warren East's wide-ranging plan for rebuilding the balance sheet.

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This has been underpinned by last November's 10-for-three rights issue, when existing investors were offered shares at 32p, a 41% discount to the theoretical ex-rights price of 55p.

The fundraising increased the total number of Rolls shares by 333% to 8.37 billion, and diluted the holdings of those not taking up their rights by 77%. For those who did participate, the emergence of the Delta variant and protracted recovery for the travel industry have meant a slow burn share price recovery over much of the year.

But the stock has picked up pace in recent months after rallying by 60% since July and 43% since mid-September. Despite this, many retail investors have jumped aboard in recent weeks: Rolls shares featured among interactive investor's most-bought shares in October.

East is due to update investors in a trading update next month, when the focus will be on whether the company has met his previous guidance on cash generation during the second half of 2021. This target is built around a restructuring programme that, once complete next year, will cost 9,000 roles and bring annual savings of more than £1.3 billion.

Large engine flying hours in civil aerospace stood at 43% of the 2019 level when the company last reported in August, and should show a big improvement as airline customers restart operations.

But longer-term, the company's focus on sustainable power also means Rolls is well-positioned to play a role in the world's transition towards a net-zero carbon economy.

This was highlighted by today's public-private funding of the new Rolls-Royce Small Modular Reactor (SMR) business, which East thinks could create up to 40,000 UK jobs and have the potential to connect to the UK grid by the early 2030s.

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As well as substantial export potential, the plants will be able to provide energy for the net-zero manufacture of green hydrogen and synthetic fuels.

Rolls, which will own about 80% of SMR, is harnessing its knowledge built up since the start of the UK nuclear submarine programme in the 1950s.

Nine-tenths of an individual SMR power plant will be built or assembled in factory conditions and some 80% could be delivered by a UK supply chain. It is expected that a single station will occupy the footprint of two football pitches and power approximately one million homes.