Many investors have given the nuclear industry a wide berth since the meltdown at Japan's Fukushima Daiichi complex in 2011. It's hardly surprising that the industry was forced to go through one of its periodic reassessments in the public eye. Harnessing energy from a fundamentally unstable feedstock has always been divisive - in every sense of the word.
UK companies are involved in various facets of the industry, but because of the vast capital nuclear projects draw in, they're usually collaborative affairs between private industry and government. Therein lies the rub; although contracts linked to the nuclear industry tend to be long-dated, they're open to political intervention. However, the ball has been set in motion for the construction of the UK's first nuclear power plant in 20 years, after the government reached agreement with French energy company EDF to build its Hinkley Point C plant in Somerset. This could prove good news for many UK-listed engineers and miners.
Engineering nuclear growth
As might have been expected, the construction of the UK's first nuclear power station in a generation has been beset with delays. In April, EDF announced plans to lay off around 400 construction staff at the Hinkley Point C site, as it wrangled with potential investors. The estimated cost of the project has climbed much higher than the £16bn disclosed by EDF last year to £24.5bn.
While the project is not expected to reach the finish line until 2023, it could generate rich rewards for UK engineers. Amec Foster Wheeler (AMEC) has already won the contract to provide project management services to all of EDF's UK nuclear power stations as well as its technical offices in Gloucester and East Kilbride. This deal, announced in March, includes the Hinkley Point site and Heysham 1 and 2 in Lancashire. The nine-year agreement is worth up to £15m a year. The newly merged engineering group has worked on every one of the UK's civil nuclear plants. Clean energy contributed £344m of revenue for Amec last year, an 11 per cent increase on the previous year, compared with falling revenues for its mining as well as oil and gas activities.
Another UK engineer benefiting from the renewed push for nuclear energy is WS Atkins (ATK). The group's revenue streams are well-diversified geographically, with service contracts linked to projects in both the UK and the US, in addition to the Middle East's burgeoning industry. The heavyweight engineer provides maintenance support for EDF's existing nuclear facilities in the UK. And last year, it was also appointed to provide design, infrastructure, and project management services to uranium-enrichment supplier Urenco's €540m (£399m) capital expenditure programme.
The group's focus in the Middle East is principally on newbuilds. Regional contracts include a project management and technical support role for Emirates Nuclear Energy Corporation on its £20bn Barakah nuclear development. During the latter half of 2014, Atkins entered the mature US market via its $14m (£8.5m) acquisition of Nuclear Safety Associates (NSA). Analysts at Liberum expect the acquisition to help grow full-year sales by 7 per cent.
Shares in our longstanding buy tip, Babcock, have fallen 14 per cent to 1,006p since publication of the group's first-half results in November. The reported numbers weren't helped by the fall-away in capital commitments by its clients in the oil and gas sector. That problem has obviously dragged on into this year, but investors shouldn't lose sight of the group's order book (£20bn at the end of January), together with its reputation for converting orders into cash. The shares are trading on 13 times 2016's forecast earnings, an undemanding rating considering cash profits are expected to grow 40 per cent this year and a further 12 per cent in 2016. We remain buyers.
Outsiders
Industrial pumpmaker Weir (WEIR) supplies valves to the nuclear industry. The group has been badly affected by the decline in upstream oil and gas markets, with orders down a quarter during the first three months of trading this year. Management expects continued weakness during the second quarter, with operating margins under continued pressure. As a consequence, analysts have slashed their EPS forecasts. Investec Securities has forecast adjusted EPS to drop a third this year to 90.8p. Sell.
IC VIEW:Chernobyl, Three Mile Island and Fukushima; for many, nuclear power remains a hard sell. But economies across the globe - both mature and emerging - are faced with the prospect of persistent energy deficits. Resistance to nuclear power has been tempered by concerns over global warming and environmental degradation brought about by the use of thermal coal - China provides a case in point. And despite the growing preponderance of LNG-fired turbines and an accelerated roll-out of alternative 'green' energy sources, global generating capacity will struggle to keep pace with the upshift in demand - hence the renewed appetite for nuclear.
