Since June 2021, Rolls-Royce Holdings (LSE:RR.) shares have been the FTSE 100’s star performer. Much of this is due to a strong post-pandemic recovery in its aircraft engines business.
But I suspect there’s also an element that reflects investor optimism about its move into the small modular reactor (SMR) market. Let’s consider how factory-built mini nuclear power plants could affect the group’s share price.
A worldwide opportunity
Last month, Rolls-Royce announced that it had won a contract to build three SMRs in Sweden. Earlier this year, it confirmed that it’s entered into a partnership to deploy 3GW of capacity in the Czech Republic. It’s also exploring other opportunities in Estonia, Hungary, Poland, and Ukraine.
Closer to home, it’s won government backing to introduce the technology to the UK, with a site in Wales earmarked for the first of three SMRs.
Although it’s impossible to accurately forecast these things, Rolls-Royce’s boss reckons there could be 400 SMRs in the world by 2050.
The case for…
Why is there such enthusiasm for these mini power plants? Although the by-product of nuclear waste casts doubts on their green credentials, other claimed advantages of SMRs include:
- They should be cheaper and quicker to build due to their modular design, and their quality should be assured.
- The smaller size of the components makes them easier to transport and install.
- The plants can be deployed more easily in countries with less sophisticated power networks.
Some of the demand for SMRs could come from the anticipated growth in data centres. Barclays Research reckons they could require 560 TWh of electricity by 2030. For context, that’s roughly what South Korea, a country with a population of just over 50m, currently consumes each year.
Citi values the total addressable market for SMRs at £45bn in today’s money. If the group can achieve 25%-50% of this, it reckons it’s worth 80p-160p a share.
The case against…
Personally, I believe a 50% market share is a little optimistic.
The World Nuclear Association has identified 41 companies working on SMR projects. It also lists seven different cooling methods. Will Rolls-Royce’s version succeed? To be honest, I don’t know, although the group’s reputation for engineering excellence makes it, in my opinion, one of the most likely to successfully bring the technology to market.
However, at the moment, it’s believed that only Russia and China have SMRs that are working. But these are small and it’s unclear whether they are commercially viable.
It’s also impossible to tell how much of the SMR potential has already been factored in to the Rolls-Royce share price.
My view
However, the group has other revenue streams.
And in my opinion, all of these are well positoned to grow over the next decade or so. Air passenger numbers and cargo volumes are going up, which will increase the number of flying hours of its engines. Its defence business is winning new orders on the back of increased global instability, and data centres are increasing the demand for the group’s emergency and off-grid energy solutions.
As a minimum, SMRs could be the icing on the cake. In a best-case scenario, they could open up another huge revenue stream, which can only help the group’s share price.
For these reasons, I believe Rolls-Royce is a stock to consider.
Should you invest £5,000 in Rolls-Royce Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce Plc made the list?
James Beard owns shares in Rolls-Royce Holdings plc and Barclays plc.
