Nuclear energy will deliver hot profits

Having repeatedly slammed the door in its face for two decades, the government has welcomed the nuclear industry in from the cold. Business Secretary John Hutton recently announced his formal backing for a new generation of nuclear power stations. Within days, European power groups were checking out potential sites around the country. French energy giant EDF has already announced it wants to build four new plants here. And German power groups want to invest £20bn building four of their own. Meanwhile, in America, where no new plant has been built for 30 years, nuclear could make a grand return. Indeed, there are 17 applicants seeking approval to build 26 nuclear plants in America, according to Robin Goldwyn Blumenthal in Barron’s.

But these plants are not going to be built overnight. At best EDF says it can deliver the first of its new plants by 2017. And there are doubts over how some nuclear groups will raise all the required capital. Central bank rates may have fallen, but the cost of project finance has not, explains Forbes. And the cost of building a nuclear plant is spiralling – with construction costs rising 185% between 2000 and 2007, says Joseph Romm in Salon. Over in the US, a new reactor costs about $13bn, which is a good bit more than the entire net worth of many companies looking to build a new plant.

But the good news for investors is that they don’t have to wait for a grand nuclear renaissance to cash in on nuclear power. Take the power firms running the 104 existing plants in America, for example, says Goldwyn Blumenthal. Not only are they cheap and paying healthy dividends, but they’re also in prime shape to see out the recession. The cost of producing electricity at a nuclear plant costs three times less than a gas plant, for example.

Moreover, the cost of the key raw material has tanked – uranium fell 50% last year to $53 a pound – and nuclear firms are set to benefit if US President Obama decides to impose a carbon tax. So “owning companies that already own nuclear is the sweet spot for investing in utilities”, says Mark Fin, utilities analyst at T. Rowe Price.

And then there’s the job of dismantling the old reactors, a thriving business in its own right. Over the next 15 years, Britain plans to shut down all but one of the ten existing nuclear power plants. The big nuclear operators rely on groups supplying dry-cask storage to store their waste on site – high tech containers with 150-ton concrete and metal cylinders that seal in the spent fuel. They also rely on specialist engineering groups to dispose of waste and dismantle the site. As such, the Nuclear Decommissioning Authority has announced an £8.6bn budget for the period to 2011.

Long term, however, it’s the firms that supply uranium and build reactors that are the best play on nuclear. According to the International Atomic Energy Agency, 630 reactors will be operating in 55 countries by 2030. That will nearly double the world’s appetite for uranium. Whichever firm cracks the design for the next generation of reactors – Areva and Westinghouse are prime candidates – will win big. That’s because governments know that if they are to meet targets for carbon emissions, nuclear energy is “the only viable, immediate and ready to roll solution”, says Jason Makansi, author of Lights Out. But for now, with credit shortages and high costs stinging plans for new facilities, businesses that run and dismantle existing reactors are the best plays. We have a look at two below.

The best bets in the nuclear sector

The biggest nuclear power generator in America today is Chicago-based Exelon (NYSE:EXC), with 17 plants spread across the country. The company has just announced a 26% rise in its fourth-quarter profits on the back of increased nuclear power output and lower purchasing costs. Exelon took a dive last year – falling 38% – but Macquarie analysts maintain a price target of $82 on the stock, a 48% uplift on its current price. The stock is valued on a forward p/e of 13 and offers a healthy 3.8% dividend yield. The dividend is also well covered by earnings, according to Robin Goldwyn Blumenthal in Barron’s. For the more adventurous, Redhall Group (Aim:RHL) is a small decommissioning specialist operating in Britain. Redhall shares took a 20% dive on Friday after it announced the collapse of an oil rig contract expected to contribute £1m to operating profit this year. But the firm’s business is still growing strongly – it reported pre-tax profits up 95% in the year to September and an order book that has swelled from £64m to £110m. It also has debt facilities available through 2014, according to Growth Company Investor. Redhall Group trades on a forward p/e of 8.2 and dividend yield of 2.2%.