The Hitachi bid for the Horizon nuclear project, thought to be around £700m, is a major boost to the UK's nuclear future. The bid is positive for both Babcock International (BAB) and Rolls-Royce (RR.) - which will help deliver the project - but nuclear is a small part of its business and with an estimated delivery date of 2020 it is unlikely to have a meaningful impact on shares.
The Horizon project was put up for sale by Eon and RWE after Germany's policy to abandon nuclear power was accelerated in the wake of the Fukushima disaster. Nuclear power is still likely to form a major piece of the UK's energy infrastructure as Hitachi is looking to build two to three 1,300 megwatt nuclear reactors at each site in Wylfa, Anglesey, and Oldbury, Gloucestershire. Hitachi has indicated at least 60 per cent of the receipts generated by the projects will go to local suppliers. Peter Rogers, chief executive of Babcock, said: "We are delighted to be working in partnership with Hitachi, a recognised leader in the global nuclear market. Our significant experience in the UK nuclear sector complements the international experience of Hitachi."
Nuclear work only makes up around 5-6 per cent of Babcock's business so this deal is too small to have a meaningful impact. N+1 Brewin analyst James Woodrow said the announcements coming in the next months on major Ministry of Defence estate management and logistics projects are of far more importance.
Nothing will happen if Hitachi doesn't get regulatory approval for its advanced boiling water reactor technology, which is why it's seeking advice from Rolls-Royce. No commercial contracts have been signed, but it's likely Rolls will help steer Hitachi through the licensing process, or generic design assessment (GDA). It's worked with rivals Areva and Westinghouse on this kind of thing, and their reactors have already received the green light in Japan, Taiwan and the US. Rolls won't actually build them, but it can make many of the parts and safety instrumentation and control systems, which it already supplies to the Chinese and the French.
There is unlikely to be any quick payback for either Rolls or Babcock. Hitachi admits it could take up to four years for its technology to be licensed and another five years for the plants to be built. The first reactors at Wylfa won't be operational until the early 2020s. We continue to rate Rolls-Royce a buy and Babcock a hold.