Rolls-Royce shares have recorded astronomical gains since their post-pandemic lows, providing investors who dared to buy the stock in the midst of the coronavirus market crash with once-in-a-lifetime returns.
The airline industry’s recovery from the pandemic and Rolls-Royce’s delivery on an ambitious growth strategy have powered shares higher, taking Rolls-Royce shares to lofty valuations that some may argue demand additional growth from the company to justify the current multiples.
Notwithstanding the growth prospects of their core aerospace, defence and power segments, investors will be looking towards Rolls-Royce’s ‘New Markets’ division, which includes the firm’s nuclear Small Modular Reactors (SMR), for a potential source of future growth.
Rolls-Royce is positioning itself at the forefront of a nuclear renaissance, with its Small Modular Reactor (SMR) technology representing what could become the company’s most significant long-term growth driver.
As governments worldwide pledge to triple nuclear capacity by 2050, the British engineering giant’s SMR programme offers the potential for growth that could substantially enhance Rolls-Royce shareholder returns over the coming decades.
The Nuclear Opportunity: A £54 Billion Prize
The numbers surrounding Rolls-Royce’s SMR venture are nothing short of extraordinary. Each SMR power station will generate 470 megawatts of low-carbon energy—equivalent to more than 150 onshore wind turbines—providing stable, affordable, and emission-free power to one million homes for at least 60 years.
This represents more capacity and longevity than any other SMR currently in development.
The economic potential is equally impressive. A fleet of Rolls-Royce SMRs could contribute up to £54 billion to the UK economy between 2025 and 2105, according to the company.
With global demand for nuclear power surging as countries including the United States, Canada, France, Japan, and Sweden commit to ambitious nuclear expansion plans, Rolls-Royce appears uniquely positioned to capture a significant share of this growing market.
First-Mover Advantage: Racing Ahead of Competition
Rolls-Royce SMR has established a commanding lead in the regulatory approval process, sitting up to eighteen months ahead of competitors in European regulatory frameworks. This first-mover advantage became even more pronounced when the company achieved a significant milestone by completing step two of the Generic Design Assessment (GDA) regulatory process in the UK and progressing to the third and final step on 30 July 2024. Crucially, Rolls-Royce is the only company to have reached this milestone, further cementing its competitive advantage.
The company’s nuclear credentials are built upon more than half a century of engineering heritage, developed by a team with an unrivalled track record in nuclear design, regulatory engagement, manufacturing, and assembly. This deep expertise, combined with the regulatory head start, positions Rolls-Royce SMR as the UK’s premier green export technology and a potential world leader in SMR deployment.
Recent New Markets Division Activity
Rolls-Royce has been particularly active in securing strategic partnerships and advancing commercial opportunities. A standout achievement came in September when Rolls-Royce SMR was named as the preferred supplier for SMR construction by the Government of the Czech Republic and the Czech State utility, ČEZ Group. This landmark agreement includes a strategic investment by ČEZ into Rolls-Royce SMR and an exclusive commitment to deploy up to 3GW of electricity capacity in the Czech Republic.
The division’s momentum continues with its shortlisting by Vattenfall as one of two companies potentially selected to deploy a fleet of SMRs in Sweden. This programme forms part of Vattenfall’s strategy to meet rising electricity demand whilst helping Sweden achieve its goal of creating a fossil-free economy by 2045. Additionally, Rolls-Royce SMR is engaged in various selection processes with multiple international counterparts, indicating strong global interest in the technology.
With first power still planned for the early 2030s, contingent upon securing orders from the UK Government’s SMR procurement process, the company is well-positioned to capitalise on the growing nuclear market.
Although SMR’s are still in their early stages, recent activity demonstrates demand for Rolls-Royce products that is likely to pick up in the coming years.
SMR Investment
The development of cutting-edge nuclear technology requires substantial investment. The Rolls-Royce New Markets division reported an underlying operating loss of £177 million in the most recent period, compared to £160 million in the prior year. This £17 million increase reflects planned expenditure to meet crucial development milestones in the SMR programme.
Trading cash flow presented a more significant outflow of £181 million compared to £63 million in the previous year, representing a £118 million increase in cash investment. Whilst these figures may appear concerning to some investors, they should be viewed in the context of the substantial long-term opportunity and the critical importance of maintaining the company’s competitive advantage in this emerging market.
The question investors will have to answer for themselves is whether the anticipation of future contribution to the bottom line from SMRs is enough to support shares and drive them higher as the rollout gathers pace.
Of course, Rolls-Royce isn’t reliant on its nuclear ambitions for growth. Civil Aerospace revenue grew 24% over last year, while Power Systems operating profit surged 40% to account for 20% of group profits. Rolls-Royce has multiple sources of growth, but there is a feeling that the group’s PE Ratio of 33 requires a sharp uptick in profit before long.