Rolls-Royce Share Price Forecast November 2021 – Time to Buy RR Shares?

Rolls-Royce (LSE: RR) shares have gained 28.5% in 2021 and are outperforming the FTSE 100. The shares currently trade near their 52-week high prices.

Last year, the shares had fallen to historical lows as the COVID-19 pandemic took a toll on its earnings. What’s the forecast for RR shares and can they continue to rise further in the short to medium term?

Rolls-Royce shares recent developments

Recently Rolls-Royce entered into an agreement with Qatar for green engineering projects. It’s a long-term partnership that would fund ventures working towards green energy transition. The two companies aim to create five unicorns or companies valued above $1 billion by 2030. Over the next 10 years, they expect the number to rise to 40.

To be sure, green energy is among the most promising investing themes. Bill Gates has predicted that clean energy would create several new Teslas. He added, “There will be, you know, Microsoft, Google, Amazon-type companies that come out of this space,” said Gates.

The optimism over green energy can be gauged from the soaring market cap of Tesla which has become the latest company to surpass the $1 trillion market cap. The company’s valuation eclipses the combined valuation of all leading automakers. Incidentally, recently Microsoft, which was co-founded by Gates, edged past Apple to become the biggest company by market cap.

RR is working on green energy transition

To be sure, this is not the first move towards green energy that Rolls-Royce has made. The company has been making several efforts to support the green energy transition. Last month, it announced that it would revamp its gas engine portfolio for higher hydrogen blending.

“After intensive tests on test benches and pilot installations at customers in 2022, Rolls-Royce will continuously market new mtu Series 500 and Series 4000 gas engines beginning in 2023 for use with up to 100 percent hydrogen, and on a design to order basis conversion kits to allow already installed gas engines in the field to run on 100% hydrogen,” it said in its release.

Rolls-Royce has been trying to repair its balance sheet

To survive the pandemic, Rolls-Royce went on a money-raising spree. From rights issues to debt issuance, the company tried every method to raise cash and bridge the massive cash burn. Now, it has been trying to repair its stretched balance sheet. The company has sold ITP Aero for £1.5 billion. The cash would help RR delever its balance sheet.

RR has been signing new contracts

Rolls-Royce has also signed a $2.6 billion prestigious engine contract with the US Air Force. The company is also looking to partner with the Indian Navy. Meanwhile, while the company’s defence business has been doing well, the civil aviation business has sagged. However, as the airline travel reverts back gradually towards the pre-pandemic levels, RR would also see a rebound in earnings.

Meanwhile, international travel has been a weak link in the aviation industry even as domestic travel, especially non-corporate travel, has largely returned to the pre-pandemic levels. However, countries have been gradually opening up their borders which would help lift the international travel demand also. RR is among the ancillary plays to benefit from the expected recovery in the aviation industry.

RR share price forecast

Analyst opinion over Rolls-Royce shares is quite divided. Of the 19 analysts surveyed by the Financial Times, only five rate RR shares as a buy or some equivalent. Seven analysts have a hold rating while the remaining six analysts rate the shares as a sell. Its median target price of 125p is a discount of over 12% from these price levels. Even the highest target price of 160p is a premium of only around 12%

Rolls-Royce share price forecast

Notably, while Rolls-Royce losses money on engine sales, the company more than makes up through lucrative long-term service contracts. The more time aircraft running on its engines spend in the air, the more money RR makes from these contracts.

Nick Cunningham of Agency Partners turned bullish on Rolls-Royce in August, days after the company released its earnings for the first half of the year. “Rolls is [now] much less driven by the extremely costly 50-year pursuit of large aero-engine market share – it has reached a 50pc share and is likely to stay there,” said Cunningham.

He added, “Defence is a good stable business and the budget cycle is favourable in the UK and Europe, as well as in major export markets, and the US defence budget cycle looks set to be much better than expected.” Cunningham also pointed to the strength in the company’s power business.

The massive investments that Rolls-Royce has been making for decades, would start paying off in the medium to long term. As air travel also gradually recovers amid the vaccinations, the long-term forecast for RR shares looks reasonably positive.

Should you buy RR shares?

Rolls-Royce shares are looking bullish on the charts and have found a strong support near the 50-day SMA (simple moving average). The shares also trade above the 100-day and 200-day SMA. The 14-day RSI (relative strength index) is 63.6, which is a neutral indicator.

The shares trade at an NTM (next-12 months) EV-to-EBITDA multiple of 10.8x which seems reasonable. All said RR shares are among the best ways to play the reopening amid the increased pace of vaccinations. The shares have rebounded from last year’s lows and should continue their recovery in the medium to long term.