Rolls Royce shares have continued their recent decline even as the news comes through of a Qatari investment in the small nuclear reactor programme. This could be seen as a surprise – investment in such a programme is likely to be a good deal for Rolls Royce after all. On the other hand, £85 million, the size of the investment, isn’t a large number compared to Rolls Royce – it’s not, as they say, a material number.
The likelihood is therefore that it is wider events driving the Rolls Royce share price, Omicron continues to rage around the world, air travel becomes increasingly restricted and so on. It’s worth pointing out that the RR incomes do not depend, particularly, on actually selling engines to people. There are fees involved in that, most certainly, but there’s an element of selling razors in how the business work. Once you’ve sold someone a razor then you’ve a capitve market for razor blades. Once you’ve got an engine in an aircraft then there’s a decades-long maintenance and repair income flow. That Rolls Royce income stream though depends upon hours in the air – exactly the thing being depressed by Omicron.
The specific announcement today though is interesting and could well become important. Rolls Royce has for some years now been working on small scale nuclear reactors. The point is that the big ones – Sizewell and HinkleyPoint and so on – are all one-off huge scale infrastructure projects. Which have that distressing ability to balloon out in cost and take decades longer than first planned. One possible solution to this is to move to something closer to mass manufacturing. Build many reactors but smaller. What is lost on economies of scale in operating costs is more than made up by being able to actually deliver, on time and to cost. Well, maybe, but that’s the business model RR is testing.
There’s no real doubt about the basic technology, this is all pretty well known. It’s the work that has to be done to gain licencing approval that takes the time. But once one version of one model is licenced then that’s it, done, for the class or series of installations.
Qatar is investing that £85 million in that subset of the Rolls Royce business. They then gain 10% of that subsidiary or subset. This isn’t, not really it isn’t, a material number given the overall size of Rolls Royce. But it is a vote of confidence in the project itself. It would also make Qatar itself a possible location for one of the first generation of such reactors – which shifts risk from the programme being reliant purely on UK political machinations.
The Rolls Royce share price seems to have shifted in the opposite direction from what we might expect given this Qatar news. But that’s just because there are other things going on as well.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.