SMR - NuScale Power Corporation: SMR Potential Suggests A Hold

2023-06-15 07:57:50 ET

Summary

• NuScale’s VOYGR SMR can produce up to 924 MWe of electricity output, making it an effective carbon-free energy source for industrial applications.
• NuScale intends to leverage on public-private partnerships to help deploy its leading SMR technology as soon as 2029.
• While NuScale is yet to commercialize its SMR product, the world is warming up to uptake of nuclear energy, leading me to a hold rating of SMR stock.

The second quarter of 2023 recorded a significant win for the nuclear fusion industry which has continued to show progress throughout the year. It was reported that after the Nuclear Regulatory Commission ((NRC)) voted to regulate nuclear fusion differently from fission, related companies were able to raise more than $5 billion to commercialize fusion. The main agenda revolves around allowing companies to advance fusion energy into a new source of energy, which to me will grow into a global investment. This situation, according to me, popularized the deployment of small modular reactors or SMR technology as an alternative energy source.

Thesis

My focus is on NuScale Power Corporation ( SMR ) which I believe has a chance of creating value for shareholders due to the expected shift in nuclear energy dynamics. I think this company has a market advantage over its peers especially in regards to regulatory approvals, product design, and energy demand. SMR is showing the intention of scaling up its business portfolio as demand expands combined with the availability of innovative technology.

Intended Funding Boost in Romanian SMR Project

NuScale Power and State-owned Nuclearelectrica signed an agreement in November 2021 to deploy NuScale’s VOYGR unit in Romania. In the last G7 Leaders summit the US revealed the intention to fund the SMR installation in Romania to a tune of $275 million. The funds are expected to help in "the procurement of lead materials, phase 2 front-end engineering, and design (FEED), hiring of expert project managers, regulatory analysis, site characterization, site-schedule and budget development.”

Romania will become a pioneering location for this novel SMR technology in Europe second only to the US. While welcoming this funding agreement, NuScale’s CEO John Hopkins stated,

Support from the Biden Administration and international partners is a signal to energy markets around the world that NuScale SMRs are an important new technology solution to global decarbonization and that Romania has the capabilities and experience to support its deployment ... we are thrilled public-private partnerships are helping deploy our leading SMR technology as soon as 2029."

The project is set to receive up to $3 billion for deployment with the leaders already looking at funding of almost $600 billion for infrastructure investments through phase 2 and beyond. Interestingly, the chosen site for the VOYGR-SMR power plant is a former coal plant in Romania. This consideration, according to me shows that SMRs may provide the best alternative to coal energy. Of special note is that the world is quickly moving towards decarbonization. In this project, the US is supported by Japan, South Korea, and the United Arab Emirates showing the intensity with which the world intends to encourage SMR deployment globally.

On its part, the Romanian government through its Cernavoda nuclear plant project has entered its second phase. Plans are underway to add 2 more units “3 and 4” and commence their commercial operation by the year 2030 and 2031. A combination of the Cernavoda nuclear project and the SMR project are in my view, likely to place Romania among the global leaders in proving safe and clean energy.

In the US, states such as Ohio Valley were stated as ripe to be converted from coal zones to nuclear power locations in late 2022. Recent research also shows that the deployment of SMR (though now in its infancy) will help in the generation of more power leading to lower costs of energy production. A ramped-up supply in the future is also expected to pair SMRs with other renewable energy sources and help strengthen the zero-carbon electric grid. In my view, the adoption of nuclear energy as an alternative energy source will be accelerated with the production of SMRs on a global scale.

More agreements in pipeline developments

May 2023 saw NuScale Power sign a memorandum of understanding with Nucor Corporation ( NUE ) to explore the deployment of SMRs to power NUE’s electric arc furnace steel mills ((EAF)). By co-locating the VOYGR SMR power plants, Nucor is set to receive reliable baseload electricity for its steel mills. In return, the partnership will see NuScale access Econiq, a net-zero steel product from Nucor. This agreement comes almost a year after Nucor invested $15 million in NuScale indicating the company’s growing interest in SMRs.

NuScale’s VOYGR SMR can produce up to 924 MWe of electricity output making it an effective carbon-free energy source for industrial applications. Additionally, due to their safety features, VOYGR discard the need for external grid connections needed for emergency planning zones in steel-making operations.

To help develop and implement its licensed operator program, NuScale announced its collaboration with Accelerant Solutions on June 7, 2023. This partnership is strategic as it will in training staff and other stakeholders on the innovative VOYGR SMR power plant design. The power plant’s 12-module 924MWe design is operated by at least 3 licensed operators from a control room approved by the Nuclear Regulatory Commission of the US. While signing the agreement, NuScale’s CEO stated,

“We are excited to sign this agreement today with Accelerant because this partnership sets the stage for the successful training for future VOYGR plant operators.” In my view, NuScale is developing a future nuclear workforce with the capability to advance new energy centers globally.

Market Size and Certification

The global small modular reactor market was estimated to be worth $9.54 billion in 2021. It is expected to reach $13 billion in 2030 growing at a CAGR of 3.6% within the forecast period. This site is significant considering the US NRC certified NuScale's SMR in Q1 2023 with the view of driving down carbon emissions. In my view, NuScale has a higher chance of getting an uprate to allow its 12-module power plant design to generate at least 77MWe each of 924 MWe from the NRC.

Risks to consider

NuScale is yet to commercialize its SMR product. Its revenue is attributed to the provision of consultation services as it seeks to manufacture the SMR and receive equipment orders. In its earnings call transcript , NuScale gave an annual negative cash flow from operations in the range of $102 million to $142 million indicating more losses in the year.

Failure to acquire the NRCs approval for the 12-module 924 MWe power plant design will affect the company’s growth process in 2023.

Stock trend and valuation

SMR’s stock price is trading 46.25% below the 52-week high of $15.85. It has also lost 12.62% (YoY). SMR’s forward price-to-sales ratio stands at 7.08 which is more than 430% above the industry average of 1.33. The price-to-book ((TTM)) stands at 5.40 which is 101% above the industry average of 2.68. These metrics show that SMR is slightly overvalued and we may see continued stock decline.

Bottom Line

NuScale Power intends to capitalize on strategic partnerships and alignments that may work to quicken NRC's certification of its VOYGR 12-module power plant design. The company has expanded its reach in Romania in a bid to introduce SMR to Europe. The development of SMRs as alternative clean energy sources will in my view accelerate the adoption of nuclear energy. However, the company is yet to commercialize its products and is yet to record significant revenues save for consultation fees. Still, I believe that the growth of SMRs will be a game-changer in the nuclear energy space. For these reasons, I propose a hold rating for the stock.

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