Will going nuclear drive the Rolls-Royce share price even higher?

Our writer considers how the UK government’s desire for greater nuclear power capacity might impact the Rolls-Royce share price.

| More on:

Image source: Rolls-Royce plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’ve long believed that the Rolls-Royce (LSE:RR.) share price is expensive.

Analysts are forecasting earnings per share of 15.8p in 2024. This means the stock currently has a forward price-to-earnings ratio of 29. Compare this to, for example, RTX, the world’s largest aerospace and defence company. Its stock trades on a multiple of 20.

However, despite my misgivings, investors continue to prove me wrong and keep driving the share price higher.

Going nuclear

But there’s one new product line that I think could transform the fortunes of the engineering giant.

A small modular reactor (SMR) is a factory-made mini nuclear power station. Each one is expected to power 1m homes and occupy a site equivalent in size to two football pitches.

In 2023, the UK government published a plan outlining how it intends to have 24GW of nuclear power generation capacity by 2050.

Under the stewardship of Great British Nuclear, a competitive process was launched to select the best SMR technologies to help meet the government’s target.

Six companies — including Rolls-Royce SMR — have been invited to tender and must submit their bids before the end of June.

Size matters

As well as using SMRs, the government intends to build a large-scale nuclear power station, similar to the ones at Hinkley and Sizewell. But these have been plagued by construction delays and cost overruns.

Hinkley Point C is now believed to be the most expensive object on earth. When it’s finally completed, it’s likely to have cost £10.03m per MW of capacity.

Rolls-Royce plans to build its 470MW SMRs at a cost of £1.8bn each. That’s only £3.83m per MW. I’m sure the government will soon see sense and abandon its plans for another large power station and concentrate on smaller ones instead.

If I’m right, it means 51 plants will be needed to meet the 24GW target. And potentially £91.8bn of revenue for Rolls-Royce.

At a margin of (say) 20%, this could translate into an additional operating profit of £18.4bn.

This ignores the potential from export markets. And there will be recurring revenue from maintenance contracts.

To put these figures in perspective, analysts are expecting a group operating profit of £1.95bn in 2024.

Cautious optimism

But I’m not getting too carried away.

The first UK SMR isn’t expected to be operational until the mid-2030s. And their delivery will be spread across a decade or so.

Also, there’s no guarantee that Rolls-Royce will be successful with its bid. The government may also choose several suppliers.

In addition, not everyone is convinced that nuclear power is a clean source of energy as the waste remains highly dangerous for thousands of years. A new government could lead to a change in policy and a shift towards other methods of energy generation.

Although share prices are supposed to be forward-looking, I doubt many investors are buying the company’s shares today in anticipation of increased earnings in 10 years’ time. It’s therefore a little early to assess how this new technology might impact the Rolls-Royce share price.

The middle of the next decade is a long time to wait for the commercialisation of SMRs. But when the future does become clearer, I’m sure the technology’s potential will be factored in to the company’s share price.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Rolls-Royce Plc. 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.

More on Investing Articles

Investing Articles

17% of my Stocks and Shares ISA is invested in these 2 UK shares

Stephen Wright looks to focus on investments in companies that have strong competitive advantages. And two UK shares stand out…

Read more »

Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA into Lloyds shares

Harvey Jones bought Lloyds shares last year and is kicking himself for failing to buy even more of them. The…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Apple is still my favourite company in the S&P 500, here’s why

Apple recently unveiled a lot of new software at a developer conference. Here's why the tech giant is still my…

Read more »

Investing Articles

5 great value UK companies I’d buy in a Stocks and Shares ISA and aim to hold for decades 

Harvey Jones is getting to work on his Stocks and Shares ISA. He thinks these five firms have solid income…

Read more »

Value Shares

Are GSK shares a bargain after falling 11%?

GSK shares have taken a hit in recent weeks due to Zantac uncertainty. Here, Edward Sheldon looks at whether they’re…

Read more »

Investing Articles

Nearing £5, could the Rolls-Royce share price hit £6?

The Rolls-Royce share price has soared in the past year. Our writer thinks there could be a strong runway ahead…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Here’s how I’d aim to build wealth the same way as Warren Buffett

Christopher Ruane looks at some of the principles used by billionaire investor Warren Buffett and explains why he also uses…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Dividend Shares

Here’s my 2024/25 dividend forecast for National Grid shares after their recent 17% plunge

National Grid shares could still be a good choice for income, even after the recent seven-for-24 rights issue, says Edward…

Read more »