Why I think the SMR deal can propel the Rolls-Royce share price higher
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A few weeks ago, I explained why I thought investors were overlooking the true potential of the Rolls-Royce (LSE: RR) share price.
In the article, I highlighted the company’s nuclear business. In particular, I noted the potential market opportunity available to the corporation in the small nuclear reactor market.
Rolls has now received funding to help support its Small Modular Reactor (SMR) business. The government had promised to match funding received from private backers if the company could raise the money. The engineering conglomerate’s private partners have agreed to put in £195m. The government is backing this with a further £210m.
I do not think it is possible to overstate the importance of this deal. If the company can successfully develop SMRs, it could transform the global nuclear power market.
New technology
However, there are two significant issues with constructing nuclear power plants. They are complex and expensive. SMR’s are designed to overcome these issues. At an estimated cost of around £2bn, they will be 90% cheaper than traditional reactors.
Rolls aims to produce most of the components in a factory, streamlining and standardising the process. The goal is to reduce costs and speed up construction.
While the power output of SMRs is much lower than traditional plants, the cheaper cost and smaller scale mean they are easier to deploy.
This could revolutionise power generation around the world. Many governments cannot afford the expense of constructing large nuclear plants. A standardised, repeatable construction process would eliminate many of the challenges that exist today.
It would also help the world transition towards green energy. SMR’s can produce the same amount of power as 150 wind turbines, and they can be kept on all the time. As such, they may have a vital role in the world’s energy transition, picking up the slack when renewable energy sources are struggling to meet demand.
Rolls-Royce share price potential
Suppose Rolls can push its designs into development and book enough orders to justify mass production? In that case, I think this business could eclipse the company’s civil aviation division over the next few decades, considering the scale of the opportunity posed by the green energy transition.
Of course, this is a big ‘if’. SMRs are still an unproven technology. It could be 2030 before the first is in action. After that, it could be another decade before production scales up. This is the best-case scenario. In the worst case, if the company cannot make the technology work, costs would spiral out of control and Rolls could encounter liquidity issues.
Even though I will be keeping these risks in mind, I am encouraged by the fact that the company already has experience in nuclear. It is the design authority for the Royal Navy’s nuclear submarines.
Therefore, I think the Rolls-Royce share price can keep climbing as the company expands into this exciting market. And based on this view, I would buy a small speculative position in the stock for my portfolio today.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.