The Royal Navy, of all things, is why Rolls-Royce (LSE: RR) management are calling now a “once in a lifetime opportunity”, specifically for a small modular reactor (SMR) programme. Could this boost Rolls-Royce shares in the near future?
The firm has worked on Royal Naval submarines since the 1950s, building nuclear reactors for them.
And now Great British Nuclear (GBN) – a government body set up last year – has shortlisted Rolls-Royce to build out SMRs.
These SMRs are smaller than existing nuclear power stations, but they could still provide electricity for around 1m homes.
The technology is similar to that used in the reactors in nuclear-powered submarines – which means Rolls has the expertise.
The firm employs more nuclear engineers and scientists than anyone else in the country.
CEO Tufan Erginbilgic claimed its designs are much more advanced than competitors, saying ”we are ahead of everybody else.”
GBN will whittle down candidates in the Spring then award contracts later this year. That’s not long before any decision might boost the share price.
The answer
The shortlist includes US and French companies including EDF. I’m sure I’m not alone in hoping we use this chance to bet on British engineering.
But Erginbilgic has plenty of other options. He recently flew out to meet the Czech Prime Minister on the issue and has been in contact with Finland, Sweden and Ukraine too.
Rolls plans to build 16 of them at first with an estimated cost of £2bn. That could have serious impact on the top line, which was £16bn last year.
Let’s not forget we have a Net Zero target for 2050. The world desperately wants to use less fossil fuels and this is driving government policy.
But green energy is at something of a crossroads. Supply cost increases have made renewables more expensive. And, of course, there is intermittency to worry about too.
Nuclear won’t be a silver bullet, but it could be vital if we’re to stand any chance of meeting our Net Zero goals.
A focus on nuclear energy has been working out well for France. Those across the Channel paid around half for electric bills than UK or Germany last year.
Failure to launch?
The biggest risk here is likely the red tape. I’d like to see the government just get on with it and award these contracts, but who knows how much more deliberating will be done?
Another hitch might be the lack of proof of concept. Only one SMR is currently in use – a floating power station that supplies around 100,000 homes in Russia.
In any case, while its role in a potential nuclear revolution is exciting, the business looks good on other fronts too.
Flying hours are approaching pre-Covid levels. The firm is earning enough to pay down debt – net debt down 39% in the last year. And the shares trade at a surprisingly reasonable price – 28 times forward earnings.
I’m happy to hold the shares I own and would consider buying more if I had the spare cash.
