Up 178% in 12 months! Is this UK stock the next Rolls-Royce?

Rolls-Royce (LSE:RR) stock is up more than 3,000% from its pandemic low of around 40p. And a lot of the recovery comes from one simple thing – people started flying again.

Not every pandemic casualty has made it back. But there’s one that’s almost tripled in the last 12 months – and I think it might have further to go.

The Rolls-Royce story

Rolls-Royce gets paid largely on engine flying hours. When planes were grounded, the cash stopped and the debt piled up instead. When demand returned, a virtuous cycle started:

• Higher flying hours boosted free cash flow.
• Free cash flow pays down debt taken on during the pandemic.
• Lower debt resulted in lower interest payments.
• Lower interest payments mean higher free cash flow.

…And so on. The balance sheet has gone from around £5bn of net debt to £2.1bn of net cash, the dividend’s back, and a £7bn-£9bn share buyback programme is under way.

The full story has more to it – Tufan Erginbilgiç’s overhaul has pushed margins to 22.5%, and higher defence spending helps. But the prime mover was the return of travel demand.

The next Rolls-Royce?

Saga (LSE:SAGA) was also hit by the pandemic – a cruise line with no passengers is mostly a floating interest bill. But the shares are up almost 180% in the last 12 months.

It’s taken longer than Rolls-Royce, but the story’s similar – no demand led to debt, which weighed on profits. Now it’s reversing.

Demand’s back and 68% of passengers are repeat customers. Importantly, Saga’s demographic – the over-50s – has more money than the rest of us and that looks durable.

Sir Roger De Haan, who ran the business until 2004, returned as chair in 2020. Since then, the focus has been squarely on the balance sheet and the amount of debt on it.

Selling the insurance underwriting arm to Ageas, alongside a 20-year broking partnership, has helped.

Still an opportunity?

Here’s the detail catching my attention, and why I think it’s still worth serious consideration even after almost tripling this year. Group net finance costs were flat at £20.6m, but ocean cruise finance costs fell 13%. The interest benefit is starting, not finished.

Saga’s also expanding. A fourth river ship is arriving next year and a third ocean liner is under consideration once the leverage ratio gets closer to 2. 

Borrowing growth is how the trouble started, but demand from the over-55s looks durable to me. Bookings for 2027/28 are 55% loaded already (versus 52% a year ago) at 11% higher prices.

Energy prices are a risk, but Saga’s hedged until December 2027. And that’s reassuring. Management’s targeting £100m in underlying profit ahead of its 2030 deadline, with guidance of £65m-£70m this year. That’s against a £1.1bn market-cap right now.

I made the mistake of thinking the Rolls-Royce run was over long before it actually was. I’ve no intention of making the same error twice.

Should you invest £5,000 in Rolls-Royce Plc right now?

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Stephen Wright does not own shares in any of the companies mentioned.