Nuclear: The power investment of 2008
By Barbara Wall
iht.com
Friday, February 1, 2008
Now that the government in Britain has formally backed nuclear power as a desirable option for the country's electricity demands, industry analysts are sizing up investment opportunities in the segment with renewed vigor. A slew of stock recommendations among utility companies, engineering businesses and uranium miners suggest that nuclear could be the winning investment theme in the power sector this year.
In a move to secure energy supplies and tackle climate change, the government sanctioned the construction of six nuclear reactors in an energy white paper published in January. The plants, set to be operational by 2020, would replace an aging fleet of 19 power stations that supply around 18 percent of Britain's electricity needs. The cost of the construction program is estimated to be £75 billion, or $149 billion, over 20 years.
Britain is part of a broader trend of growing support for nuclear energy in other countries. The French company Areva, the world's largest builder of nuclear reactors, forecasts that 150 to 300 nuclear reactors will be built in the world from now to 2030. At least 50 of them will be built in China and India, according to news reports.
This is encouraging for global power plant builders like Mitsubishi Heavy Industries,Toshiba through its unit Westinghouse and Areva, which have all benefited from China's investment in new nuclear in recent years. Analysts figure that decommissioning projects in more mature markets like Britain, Russia, Japan and France could prove to be an even bigger money maker for the nuclear industry. A review of the global decommissioning market, carried out by the Nuclear Industry Association in Britain, estimates such projects to be worth £300 billion over the next 30 years.
But for now all eyes are focused on the companies bidding for a share of Britain's nuclear work. British Energy, the country's main electric power generator, is in talks with a number of potential partners including General Electric, Westinghouse and Areva. A decision is expected by the end of the second quarter, though British Energy's involvement will probably be limited to that of a minority partner because possible sites are the only assets the company have to offer.
Speculating on the likely outcome of the bids, Elaine Coverley, a utilities industry analyst at Brewin Dolphin Securities in London, said, "A consortium or company will need to bring many different specialties to the table to be successful." A "viable partnership," she added, would include an electricity retailer - possibly Centrica, which owns British Gas, or Scottish and Southern Energy; a European nuclear operator like Iberdrola; RWE or EDF Energy, a division of Électricité de France; and a maker of nuclear turbines like Westinghouse or GE.
Investors trying to profit from nuclear growth in Europe should invest in a utility with expertise in many different areas, Coverley said. She recommended RWE, which is based in Germany and owns Powergen and npower in Britain, and Iberdrola, which is based in Spain. Both companies have strong customer bases in several European countries including Britain, she said, as well as relationships with the main turbine manufacturers, GE and Westinghouse.
Asked to choose between the two utilities, Coverley picked RWE, which is facing regulatory uncertainty over the possibility of life extensions for the group's nuclear power fleet and is consequently trading at a discount to its peers. "If the German government were to allow these extensions, RWE would be the main beneficiary," she said.
The outcome is still in the balance, but analysts figure that Britain's stance on nuclear power could bolster public opinion of nuclear in Germany and push the government's hand. Even assuming that German policy makers refused to be swayed, Coverley said, RWE's earnings and dividend expectations would still be upgraded over the coming months because of rising coal prices and tighter energy supplies in the company's core markets of Germany and Britain.
Benjamin Leyre, a utilities industry analyst with BNP Paribas in Paris, is also playing the nuclear theme this year, though his favorite stocks are EDF and E.ON, which is also based Germany. "As well as having formidable track records in the operation of large portfolios of nuclear power plants," he said, "both companies are well regarded as designers and builders of nuclear reactors - a unique and valuable combination of skills."
Coverley said corporate activity could also contribute to the share price performance of large European utilities. "Managers are under pressure from shareholders to redeploy some of the capital that has accrued in recent years," she said. "A spending spree is on the cards, and the likely focus will be acquisition targets in Britain - the most deregulated market in Europe."
The consortium or company that wins the bid to build Britain's new nuclear power plants will require the services of such specialist subcontractors as engineers, consultants and waste-management companies. Local companies pitching for a role in the cleanup of Britain's nuclear legacy include local project services specialists like Amec, Serco Group, Costain Group and Redhall Group.
Andrew Brown, a research analyst with Panmure Gordon in London, gave a strong recommendation to buy shares of Costain Group. "Although Costain Group does not separately disclose its nuclear business," he said, "it is expected to derive more of its revenues from this segment in the future." Costain is part of a bidding consortium for the British business that includes Amec, Areva and EDF.
Costain is listed in the construction and materials sector of the stock market, which may put some investors off owning the shares. "Sentiment towards British building firms is at an all-time low because of the ripple effect from the U.S. housing slowdown and an increasingly pressurized commercial property market," Brown said. "But Costain is bearing up well, with forward orders worth in the region of £1.5 billion."
Costain's stock also looks relatively inexpensive. "Like many of its peers Costain's share price has come back a long way in the past year despite hefty profits and solid fundamentals," Brown said. The stock is trading on eight times expected earnings for this year, which is "inexpensive on an historical and relative basis," Brown said.
Amec, Britain's largest private sector supplier of engineering services to the nuclear industry, and Serco, which helps manage the Atomic Weapons Establishment center at Aldermaston, Britain, are two stocks that were recently recommended by Iain Armstrong, a support services analyst at Brewin Dolphin. "Both companies have experience in nuclear decommissioning, though Amec is probably the more interesting play in this space given its more diverse business base," he said. "Amec has extensive decommissioning interests in Russia as well as Britain, and unlike Serco has expertise in the design of nuclear power stations."
Kevin Lapwood, a support services analyst at Seymour Pierce, a stock brokerage firm in London, disagreed with Armstrong's thesis and mentioned Serco as the more attractive investment of the two. "Amec has fingers in many different pies, but we believe Serco has a stronger claim on decommissioning contracts in Britain because of its government links," he said. Serco's nuclear-related operations include safety and environmental work for the Nuclear Decommissioning Authority and the Royal Navy's nuclear submarine fleet.
Lapwood added: "Amec's stock has had an excellent run over the last 18 months and looks overvalued at current levels. We would wait until it came back 10 percent before considering it as a recommendation."
Redhall, which builds the containers to store nuclear waste, is another potential beneficiary of Britain's nuclear cleanup. Jordon Nuclear, the company's nuclear decommissioning and engineering unit, has received several important contracts in recent months, including one to clean up Sellafield, the first commercial nuclear power station in Britain. Andrew Nussey, a support services industry analyst with KBC Peel Hunt, said he believed that more contracts were in the pipeline.
Redhall stock trades on the AIM index at 18 times expected earnings, which Nussey said was reasonable given the group's growth profile and recent acquisitions. In 2007 revenue growth was 36 percent and pretax profit growth was 110 percent. The acquisitions of Jex Engineering and Steels Engineering Services helped contribute to results, Nussey said.
Other companies that could benefit from a nuclear renaissance include such cleanup consultancy firms as WS Atkins and RFS, which are on Jupiter Asset Management's "buy" list. Michael Liebreich, director of New Energy Finance in London, is exploring opportunities in areas such as nuclear instrumentation, transportation and security. "The nuclear industry faces a huge shortage of skills due to years of underinvestment," Liebreich said. "We aim to identify the companies that can address these problems."
With this end in mind, Liebreich has set up a New Nuclear division to research the global market for investment candidates.
Investors in nuclear energy can also look to the companies that produce the raw materials: the uranium miners. Scott Finlay, a mining analyst at Canaccord Adams in London, said he figured demand would push uranium prices up from now to July, hitting a peak of $122 a pound, up 25 percent from current levels.
"When the price of uranium rises, uranium mining stocks also tend to track north," Finlay said.
His stock picks included Tournigan Gold and Aurora Energy Resources. Both own large undeveloped uranium deposits which will be mined when exploration is completed. Tournigan has a pipeline of earlier stage uranium projects in Slovakia, and the U.S. states South Dakota and Arizona, while Aurora Resources owns one of the largest uranium deposits in Canada.
Investors can gain access to uranium miners and other players in the nuclear segment via such exchange traded funds as Van Eck Global Market Vectors Nuclear Energy ETF. The ETF seeks to replicate the performance of the DAX global nuclear energy index, a basket of the securities of 40 nuclear energy companies listed on global exchanges. The fund includes Cameco, Paladin Resources and other uranium miners as well as nuclear plant builders Mitsubishi Heavy Industries and Kajima. Also represented in the index are companies engaged in uranium enrichment and uranium storage, nuclear fuel transportation and nuclear-related equipment.
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