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I Rolls-Royce (LSE: RR) share price rose 6.2% in September, taking annual gains to 73%. And a two-year return of 645% – they say FTSE 100 stocks are falling asleep?!
Much has been written recently about the company's small reactors (SMRs). These aim to transform nuclear power from large infrastructure projects to factory-built products.
As businesses and governments increasingly aspire to meet net zero carbon goals by 2050, SMRs are said to be a major new growth industry. And Rolls-Royce, with decades of experience building nuclear weapons for Royal Navy submarines, has positioned itself to be at the center of it.
First mover advantage
On September 18, the company was selected by the Czech Republic as the preferred supplier of these small generators. The firm said this “It reinforces Rolls-Royce SMR's position as Europe's leading SMR technology.”
More good news followed on 26 September when the UK announced that Rolls-Royce SMR would join three other companies in the next phase of its reactor design competition. These are GE Hitachi, Holtec, and Westinghouse. NuScale you missed it.
Rolls-Royce SMR CEO Chris Cholerton commented: “[We are] the only UK SMR company and is 18 months ahead of competitors in the regulatory approval process. Today's news that we will be moving forward into formal negotiations with GBN will help us secure this important early adopter opportunity..”
A winner can be chosen at the end of the year. Meanwhile, the company has advanced to the final two in the Swedish selection process. Deals could be struck with Sweden and the Netherlands as early as 2025.
According to estimates, the global SMR market could reach $295bn within 20 years. So this has the potential to change the company's income.
Check the truth
Now, as promising as all this sounds, these reactors are not expected to be used until the 2030s. Also, the funding required to roll out a large number of SMRs is still unclear.
In late 2023, US rival NuScale faced major problems when its contract with a Utah energy group was terminated due to delays and cost overruns. The estimated cost of this project has ballooned from $3bn in 2015 to over $9bn in 2023!
A key attraction of SMRs lies in their cost predictability compared to conventional nuclear plants, which are notorious for running well over budget. So, while SMRs have the potential to change the game for Rolls-Royce's share price, there is a lot of uncertainty.
The most immediate concern is the situation in the Middle East. This has already disrupted air traffic and may exacerbate supply chain problems, posing additional risks to Rolls-Royce's operations.
Long term trends
Of course, increasing geopolitical instability may also drive greater demand for advanced military technology and naval systems. Rolls' Defense revenue rose 8% in the first quarter.
Meanwhile, with global air travel expected to double over the next 20 years, its key Civil Aerospace division is poised for significant growth.
Finally, its Power Systems business is capitalizing on the rapidly growing demand for backup power for data centers. In accordance with Moody'sGlobal data center capacity is expected to double in the next five years, due to the energy-intensive needs of artificial intelligence models.
I am happy to continue holding my Rolls-Royce shares and would consider buying more if the share price suffers as we head into winter.
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