Rolls-Royce (LSE: RR) shares have risen 1,456% since Tufan Erginbilgiç became CEO in 2023. And at regular intervals along the way, the markets have doubted whether the increases can keep on coming.
One reason is that the aerospace, defence and power systems giant has spectacularly underpromised and then overdelivered on its results. Another is that its three core business sectors have been reorganised to deliver outsized growth. Additionally, the firm has developed new revenue streams, including small modular reactors (SMRs).
So, does the share price still look undervalued now?
What’s Erginbilgiç’s nuclear vision?
Erginbilgiç thinks Rolls-Royce’s SMR business has “a trillion-dollar-plus market potential” that could eventually make it the UK’s most valuable company.
One part of this is the ongoing global energy transition to non-fossil fuels. Another is the huge energy demands of artificial intelligence and tech data centres, with Google, Microsoft, and Meta already aggressively looking to secure SMR-generated power.
Erginbilgiç projects the world will need around 400 SMRs by 2050, with each costing up to $3bn (£2.3bn). He believes Rolls-Royce’s decades of experience supplying the UK’s nuclear submarine fleet with reactors gives it an unrivalled competitive advantage.
He added: “There is no private company in the world with the nuclear capability we have. If we are not market leader globally, we did something wrong.”
What progress has been made?
On 15 June, Rolls-Royce was selected by Swedish utility Vattenfall to supply three SMRs. Rolls-Royce advertises its 470 MW SMR unit — the ones bought by Sweden — at roughly £1.8bn–£2.2bn per unit.
On 14 June, Rolls-Royce signed a trilateral deal with the UK National Nuclear Laboratory, and the Japan Atomic Energy Agency. This agreement is a core anchor of a landmark £18bn UK-Japan technology and investment package.
On 24 April, Czech state-owned utility ČEZ Group moved into the active engineering and planning stage of its SMR deal. The objective is to deploy up to 3 Gigawatts of power from six of Rolls-Royce’s standard 470 MW units, with a total value of £10.8bn–£13.2bn.
Do the shares still look cheap?
These nuclear contracts come when the group is forecast to deliver sustained revenue expansion and a dramatic uplift in returns.
A risk to these is any slowdown in wide‑body engine flying hours from softer long‑haul demand or airline capacity cuts. Another is any regulatory delay or funding bottleneck for its continued expansion.
Nevertheless, analysts forecast revenue will grow an annual average of 8.2% a year to end-2028 at minimum. And they project a stunning return on equity of 193% by that time too.
All this leaves its 19.7 price-to-earnings ratio — against a competitor average of 28.6 — looking even more of a bargain than it already did, in my view.
These firms include Northrop Grumman at 15.9, BAE Systems at 25.1, RTX at 34.6, and TransDigm at 38.9.
My investment view
I have wholeheartedly ignored short-term market noise about Rolls-Royce shares throughout their rise. Instead, I have focused, as I always do, on long-term fundamentals. As a result, I have done rather well.
I intend to keep pursuing this policy here, given Rolls-Royce’s superb broader prospects and the new growth that SMRs offer. As such, I will be adding to my holding again very shortly.
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Simon Watkins owns shares in Rolls-Royce.
