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Will Rolls-Royce shares rocket after today's nuclear announcement?


ArvinIG

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The Rolls-Royce share price has risen 5% to 149p. It's announced £450 million in funding from the government and private investors for the development of mini nuclear reactors to kickstart the UK's green economy.

Rolls-Royce
Source: Bloomberg
 
 

The Rolls-Royce (LON: RR) share price is no stranger to volatility. Shares in the multinational aerospace and defence company hit an all-time high of 1,159p back in December 2013. It then fell to 531p by 29 January 2016, before peaking at 1,088p on 3 August 2018. Slowly sliding in value, the pandemic’s effect on the aerospace industry saw it sink to an all-time low of 69p on 6 November 2020. Since then, Rolls-Royce has been on an aggressive £2 billion cost-cutting mission whilst landing multiple new contracts in the past few months. At 149p today, it’s risen 115% over the past year.

And with increasing government investment in the company’s ventures, it could have further to rise.

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Rolls-Royce mini nuclear reactors

Rolls-Royce has now secured the funding to develop state-of-the-art mini nuclear reactors. The company said that ‘Rolls-Royce Group, BNF Resources UK Limited and Exelon Generation Limited will invest £195m across a period of around three years. The funding will enable the business to secure grant funding of £210 million from UK Research and Innovation funding,’ as part of the government’s green 10-point plan in the wake of COP26. Rolls-Royce will increase funding by £50 million in the second phase.

One key advantage of the mini reactors is that they are cheaper and faster to roll out than current large-scale reactors. For example, Hinkley Point C, which is still under construction, had an initial price tag of £18 billion. But it’s already risen to £23 billion.

Rolls-Royce said it would ‘harness decades of British engineering, design and manufacturing,’ to roll out the first of the mini reactors, with each generating enough electricity to power 1.3 million UK homes. Costing £2 billion, they generate significantly cheaper electricity than the traditional large-scale reactors. And with 20% of the UK’s electricity currently generated by large-scale nuclear reactors that are due to retire by 2025, Rolls-Royce seems to have identified a profitable gap in the market.

CEO of the new SMR (small modular reactor) consortium, Tom Samson, said it would ‘deliver a low cost, deployable, scalable and investable programme of nuclear power plants,’ describing the deal as a ‘major vote of confidence in British nuclear technology.’ The first SMR is planned to go online by 2031, with plans for 15 more as the project advances.

And Business Secretary Kwasi Kwarteng said it was a ‘once in a lifetime opportunity for the UK to deploy more low carbon energy than ever before.’ He also highlighted the potential for the UK to become a ‘global leader in innovative nuclear technologies we can potentially export elsewhere.’

Rolls-Royce
Source: Bloomberg

Rolls-Royce share price: Where next?

If this share price story seems familiar, that’s because it is. On 27 September, Rolls-Royce announced a new $2.6 billion contract to supply and maintain engines for the US air force. The share price rose 10% to 147p, before falling back to 131p by 29 October. A similar fall after today’s announcement is perfectly possible.

But the company expects a return to profitability in 2022. And its £2 billion disposal program is continuing apace — yesterday, it completed the sale of its civil nuclear business to Framatome. CEO Warren East says that this ‘leaner cost base together with a strong liquidity position’ will give Rolls-Royce capital to grow when global aviation travel recovers.

And the new nuclear deal is not its first piece of green news this year. It’s designed a new Ultrafan engine that will be 25% more fuel-efficient than current models, with a power gearbox that recently broke the aerospace world record. Meanwhile, Rolls-Royce has committed to being a net-zero company by 2050.

The Rolls-Royce share price is 87% below its all-time high. It’s unlikely to rocket ten-fold anytime soon. But the disposal of non-core assets to focus on new profitable ventures could see a slow long-term price recovery.

 Charles Archer | Financial Writer, London
 10 November 2021 00:35

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