Rolls-Royce share price news: tough headwinds are threatening the very existence of the civil aviation unit of this century-old manufacturer
07:18, 27 May 2020
The aviation industry has been recently shaken to its roots after the Covid-19 pandemic effectively wiped out more than 90 per cent of the demand for air travel due to the restrictions imposed by countries around the world to contain the outbreak.
The entire supply chain that serves this important industry has been disrupted and a wide range of companies has been swept into the whirlwind, including commercial airlines, aircraft manufacturers and aircraft parts manufacturers such as Rolls-Royce Holdings, the UK-based company that produces jet engines for major aerospace companies including Boeing and Airbus.
In response to the crisis, most commercial airlines around the world have cut their capital expenditures in an effort to save money to pay for their operating expenses while the outbreak is contained and air travel resumes to a decent level.
As a result, new orders for aircraft have dropped significantly, as reflected by recent reports from Boeing, which revealed several order cancellations during the first three months of the year consisting of around 307 planes.
A similar situation has been reported by other major aircraft manufacturers including Airbus and Embraer, both of which have seen the demand for their products plummet amid the crisis.
All of these companies use Rolls-Royce jet engines for a portion of their aircraft models and this has put the century-old aviation company in distress, as its demand has basically evaporated out of the blue, leaving the management team with few options on the table to survive until the crisis is over.
Why are Rolls-Royce shares going down?
Rolls-Royce shares have nosedived since March 3, after most countries imposed travel restrictions and the situation for the entire aviation industry worsened, painting a clear picture of what may be ahead for aircraft parts manufacturers such as RR.
RR shares somehow managed to endure the February sell-off but only a couple of weeks later they went into free fall, after the company started to report a deterioration of its finances and a potential far-reaching restructuring plan in light of the severe situation.
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Rolls-Royce share price news
A quick Rolls-Royce share price analysis shows how the stock lost around 56 per cent of its value from early March to May 22, closing Friday’s session at £280.60 per share.
The last time the company traded at such low price was in 2009, at the height of the subprime financial crisis, back when credit markets were frozen and manufacturers struggled to find financing to carry on with their operations.
That said, the stock is still trading 19 per cent above its 52-week low of £235.50, while it remains 70 per cent down from its 52-week high of £930.20. Meanwhile, Rolls-Royce market capitalisation at current market prices sits at £5.42bn ($6.7, €6.1bn).
Rolls-Royce stock news
The most relevant among the recent Rolls-Royce share news is the announcement of a far-reaching reorganisation plan revealed by the company’s top management only a few days ago.
The plan consists of company-wide cuts that seek to “strengthen the financial resilience” of Rolls-Royce’s business through a cut in capital expenditures, employee layoffs, and a reduction in operating expenses with the purpose of saving around £1.3bn per year.
The company anticipates that this reorganisation effort will cost approximately £800m, spread across the next three years, as the company progressively downsizes its operations.
The head of the company added: “We have to do this right, which means we will work closely with our employee and trade union representatives as appropriate, look at any viable alternatives to mitigate the impact, consult with everyone affected and treat our people with dignity and respect.”
Moreover, the restructuring contemplates a reduction of around 9,000 jobs across the company, which is almost 20 per cent of Rolls-Royce’s 52,000 global workforce.
Finally, the company will review its manufacturing and organisational structure in depth to find potential opportunities to move people from its Civil Aerospace unit to other business units such as its Defence segment.
Before this plan was unveiled, Rolls-Royce had already furloughed 4,000 employees in the United Kingdom; it had also announced a cut in its forecasted wide-body plane engines output to around 250 units, down from a previous estimate of 450 for 2020.
RR shares news: what are analysts saying about Rolls-Royce?
Analysts are still on the fence about how the future of the aircraft parts manufacturer may look like, as reflected by their earnings estimates, price targets and recommendations, all of which are giving mixed signals.
Out of the 22 analysts surveyed by Yahoo Finance in April, five of them rated RR as a buy, nine as a hold, and 12 of them as an underperform or sell.
Price targets are no different, as they are currently ranging from £675 to £1,250, while the average target price for the next 12 months is currently at £974.81.
Rolls-Royce will be giving investors a trading update in early July 2020 according to the company’s website, while its financial results for the first half of 2020 will be presented in August.
According to its latest financial report, RR had around £4.9bn in long-term debt and £4.5bn in cash and equivalents. Total non-current liabilities by the end of 2019 totaled £20.6bn, while the company ended the year with a negative equity balance of £3.35bn.
Bottom Line
Rolls-Royce has been facing an unprecedented crisis since the Covid-19 pandemic smashed the civil aviation industry as a result of worldwide travel restrictions.
The effectiveness of this latest reorganisation remains to be seen and the ultimate impact of these efforts on the company’s top and bottom-line results continues to be uncertain, as restructuring costs, potential obstacles arising from trade union conflicts, and a highly likely second wave of the virus could put more downward pressure in the company’s already battered financial performance over the next couple of years.
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