The Rolls-Royce (LSE:RR) share price traded below 100p for much of July. However, last week saw a strong move higher with double-digit gains to enable the price to finish the week at 112p. Given such a jump in a stock that has been on a downward trend since the start of the pandemic, this catalyst is worth me looking into. From there, I can decide whether to buy shares.
Good results
The first (and major) reason for the jump was the release of half-year results. This was eagerly anticipated by many investors and was taken as a net positive. The large restructuring within the business is going well, with 90% of its headcount reduction completed. Overall cost-saving measures meant that underlying operating profit came in at £307m.
Revenue for H1 dropped slightly from the previous period (£5.16bn vs £5.67bn ). However, the cost savings meant that the business was able to flip from a loss to a profit. This really highlights the importance of tight expense controls. Even during a period when revenue didn’t grow, control of outgoings shows that the company can still be profitable.
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I think the results are a valid reason for a boost in the Rolls-Royce share price. My one note of caution is that there’s only so far the company can cut costs before it’s fully efficient. From then on, if revenue can’t grow, the business will be in trouble.
Deal-making news
The second reason for the boost was confirmation that Rolls-Royce is in talks to sell off some non-core operations. It’s talking to a US private equity company to sell ITP Aero. It also has a buyer for its Norwegian maritime subsidiary Bergen. It isn’t clear what proceeds will be gained should both deals get signed off, but it’s expected to be in the billions.
Clearly, this is good news all round. Rolls-Royce wants to restructure and slim down to become more efficient. Selling off these areas also allows cash to flow back into the business. It could use this to pay off some of the debt taken on during the pandemic, or to commit to future projects.
The Rolls-Royce share price could see a further move higher when more details of these deals are announced, as well as what the plans are for the proceeds.
Travel helping Rolls-Royce shares
The final reason for the move higher last week was good news regarding travel restrictions in the UK. The travel light system now has more countries at green or amber, particularly in Europe. This should allow more international flights, with travelers having fewer restrictions imposed on them on landing.
Given the size of the commercial aviation arm of Rolls-Royce, higher flying hours from airline operators should indirectly boost demand for the company.
All three reasons mentioned above are positive for the Rolls-Royce share price. This doesn’t mean there is no risk involved. Rolls-Royce is still heavily laden with debt, with it expecting to rise by year-end to £4bn. Also, the lack of organic revenue growth is concerning. Investors will now be watching out for further news to see if more gains in the share price are around the corner. Despite the risks, I’d consider buying a small amount of shares now and look to build a larger position over time.
