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The price of Rolls-Royce (LSE: RR) shares jumped above 911p Tuesday (10 June), as the engineering giant finally got the nod from the government to build the UK’s first-ever small modular reactors (SMRs).
This means the FTSE 100 blue-chip stock’s now up by a mind-bending 935% in three years. Who says Footsie shares are forever boring?
Here’s what Rolls-Royce shareholders found out about SMRs today.
Decision day
Following a drawn-out two-year competition, Rolls-Royce has been selected ahead of various international SMR vendors. This will see the government initially invest more than £2.5bn to build and deploy three SMR units in the UK, though we don’t know the locations yet.
Each one will provide about 470 megawatts and start generating power by the mid-2030s. Rolls-Royce SMR, which is part-owned by Qatar’s sovereign wealth fund and a couple of others, had already been chosen to build SMRs for the Czech Republic. It’s a finalist in Sweden’s selection process too.
Rolls-Royce is now the only SMR maker with firm commitments in both the UK and EU, giving it first-mover advantage in a massive emerging industry. According to the International Energy Agency, global electricity generation is forecast double by 2050, with the SMR market reaching nearly £500bn by then.
CEO Tufan Erginbilgiç said: “This is a very significant milestone for our business and Rolls-Royce SMR. It is a vote of confidence in our unique nuclear capabilities, which will be recognised by governments around the world… I believe the value of Rolls-Royce SMR will grow materially from here.“
Still on track
On 1 May, we learned that Rolls had enjoyed a strong start to the year, with all divisions performing well. This enabled management to reaffirm its 2025 guidance of £2.7bn-£2.9bn of underlying operating profit and £2.7bn-£2.9bn of free cash flow.
In the first three months, large engine flying hours grew to 110% of 2019 levels, and there was strong order intake at its defence division.
The Power Systems unit, which tends to get less media coverage, is enjoying strong tailwinds from back-up power generators for data centres. With power-hungry artificial intelligence (AI) systems being adopted globally, this division looks set up for decent long-term growth.
Indeed, everywhere you look, there appears to be new growth opportunities popping up for the firm. Data centres, massive European defence spending, and new planes being ordered across Asia, where the middle class is expected to total around 3bn by 2050.
According to Bloomberg, China’s considering a mammoth order of 300-500 new planes from Europe’s Airbus next month. This should benefit Rolls-Royce, assuming there are a good few orders for the Airbus A330neo, which are exclusively powered by Trent 7000 engines.
Further out, there are other potential growth catalysts, including Rolls’ cutting-edge UltraFan engine, re-entry into the narrow-body plane market, and now SMRs.
Valuation concerns
Based on current forecasts for 2025, Rolls is trading at a forward-looking price-to-earnings multiple of 37.3. This is quite high, and adds valuation risk if growth were to be disrupted by a deterioration in global supply chains. There could also be execution snags with SMRs before the mid-2030s.
Although Rolls’ stock could still be worth considering for the long term, I wouldn’t bet the farm at an all-time high. I’m very happy with the shares I first bought at 149p.
