Rolls-Royce (LSE:RR) shares have kicked into a higher gear this week, reaching a record high of 1,424p. And investors can (in part) thank Sweden for the 9% gain in just three days.
Specifically, Videberg Kraft (the joint venture owned by Swedish utility Vattenfall and Industrikraft), which just selected Rolls-Royce SMR to build the country’s first new nuclear power reactor in over 40 years.
Another factor helping boost the share price is a potential deal between Iran and the US to end the Middle East conflict. So there have been two positive developments this week.
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Any lasting resolution to the Iran conflict is a plus on a number of fronts. But for Rolls-Royce, it reduces the near-term risk to international air travel and engine flying hours, as well as the logistical nightmare of long-term disrupted shipping routes.
The Sweden small modular reactor (SMR) news is obviously a much bigger deal over the long run. Rolls-Royce SMR will build three SMRs to be deployed on the Värö peninsula, located on Sweden’s west coast.
So we now have the UK, Czech Republic and Sweden signed up. There’s also mutterings that Europe’s largest economy, Germany, might have a rethink on nuclear for energy security and achieving net zero. If so, that would be a massive opportunity, though this is just speculation so far.
Success in Sweden shows the real momentum that Rolls-Royce SMR is generating as it builds upon its crucial first-mover advantage in a market that is growing and attracting significant international interest…We are unlocking significant future growth opportunities through our unique nuclear capabilities and are well positioned to benefit from the ongoing nuclear renaissance.
CEO Tufan Erginbilgic.
What don’t we know?
No financial details have been announced yet, but Sweden will obviously be another multibillion-pound deal given that each SMR is expected to cost around £2.5bn.
We also don’t know what margins will ultimately be achieved, though management says cash flows will be positive throughout, with a high return on capital employed.
On top of this, it’s not clear yet whether Videberg Kraft invested in the SMR business (like ČEZ Group did in the Czech Republic). If so, then I would find this equity-for-contract element unattractive, as it dilutes the potential for Rolls-Royce (which owns about 58% of the SMR business).
Finally, while the first SMR projects have already started to generate revenues and profits, there obviously won’t be any recurring revenue (aftermarket and lifecycle services) till the mid-2030s.
But once up and running, these mini-reactors should provide an attractive revenue stream for decades, with an operating lifespan of at least 60 years.
An SMR giant in the making
Management sees a total addressable market of more than 400 SMRs by 2050, and Rolls-Royce is now in pole position to be a leading global player in this emerging market.
The company has also started the regulatory process in the US, where the opportunity is enormous, albeit with more competition.
Rolls-Royce is uniquely positioned to help the hyperscalers with their future data centre power demands, including backup power, prime power, and with SMRs.
Tufan Erginbilgic.
Naturally, the stock is pricey around an all-time high, with a forward earnings multiple at 35. So investors considering buying Rolls-Royce should tread carefully, knowing the valuation risks involved, especially if there’s an earnings and/or guidance hiccup late next month.
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Ben McPoland owns shares in Rolls-Royce.
