Could a Rolls-Royce SMR IPO Unlock Further Upside In Shares? Price Target Raised

Rolls-Royce shares (LON: RR) are down 2% today, giving back some of yesterday's 2.8% gain that followed reports that the company is considering an IPO for its small modular reactor (SMR) business, sending ripples through the market. The move comes as the company enjoys a year of significant financial gains and strategic advancements, which has seen the share price surge +89% YTD.

RR has attracted plenty of attention this year after seeing shares significantly outperform markets, and news that the company could unlock further shareholder value is seen as a potentially bullish catalyst, should it come to fruition. Discussions with investment banks are reportedly focusing on the future financial requirements of the business, including the potential for an IPO.

The exploration of funding options for the SMR unit aligns with Rolls-Royce's involvement in the UK government's initiative to construct a fleet of small nuclear reactors. The government has committed £2.5 billion over three years to support this project, aimed at generating up to 1.5GW of capacity, sufficient to power approximately 1.5 million homes. A decision regarding fundraising for the SMR business is expected after the final government contract is finalized later in 2025, with profitability anticipated by 2030.

Beyond domestic initiatives, Rolls-Royce is also pursuing international collaborations to expand the reach of its SMR technology. A partnership with the Czech Republic is underway to explore opportunities for SMR deployment, potentially involving the export of up to six SMR units.

Czech energy company CEZ is considering acquiring a 20% stake in Rolls-Royce's SMR business, with plans to deploy up to 3 gigawatts of SMR capacity across the country. This international collaboration underscores the rising global demand for SMR technology and positions Rolls-Royce as a key player in the energy sector.

Rolls-Royce's impressive interim financial performance has further bolstered market confidence. The company reported an underlying pre-tax profit increase from £1.03 billion to £1.68 billion and an underlying operating profit growth of 50% to £1.73 billion. Underlying revenue also saw an increase from £8.18 billion to £9.05 billion.

As a result of this strong performance, Rolls-Royce raised its 2025 guidance, now expecting an underlying operating profit between £3.1 billion and £3.2 billion and free cash flow between £3 billion and £3.1 billion. The company has also reinstated dividends and announced a £1 billion share buyback program, signaling financial stability and a commitment to shareholder value.

The positive outlook on Rolls-Royce's stock is also reflected in recent analyst upgrades and forecasts. Morgan Stanley raised the firm's price target on Rolls-Royce to 1,275p from 900p, maintaining an Overweight rating on the shares.