Japan’s battle to avert a full-scale meltdown at its Fukushima power plant has damaged prospects for nuclear energy. Many countries have put building plans on hold and tightened safety rules. But none of this should prove fatal for the industry. Following the BP oil slick in the Gulf of Mexico, people were baying for off-shore exploration to end. Yet 2011 could see the resumption of deep-sea drilling in the area. The events in Japan are more serious and remain unresolved. But assuming there is no future catastrophic failure, the nuclear sector should get back on its feet eventually.
China and India, with their vast populations, have few alternatives if they are to wean themselves off oil. And France, for instance, derives 80% of its electricity from atomic power, so it is unlikely to turn its back on the technology. Areva, 90% of which is owned by the state, is France’s top expert on everything nuclear. It designs, builds and maintains facilities; mines and enriches uranium; and decommissions plants. Its technology is installed in 103 sites globally and it sports a €44.2bn order book, equivalent to more than four times turnover. It also has a rapidly growing renewable energies portfolio.
Unsurprisingly, the stock has tanked. But here’s the thing – arch-rival GE supplied Fukushima, while Areva’s next-generation reactors incorporate stringent safety measures. These expensive features were put under the spotlight after the firm lost out to a cheaper Korean rival to supply $40bn worth of reactors to Abu Dhabi. But chief executive Anne Lauvergeon stresses its new reactors are designed to sustain shocks from huge earthquakes and even plane crashes.
Areva (Paris: CEI), rated a BUY by Natixis:
Areva is in the process of building four such reactors – costing about $5bn each – in Finland, France and China. It has also signed a provisional order to sell two to India and could bag another six contracts by the end of 2012. Naturally, in the immediate aftermath of the Japanese radiation leak, these are at risk of delay or cancellation.Yet Areva has the financial muscle to be patient. Revenues for 2010 rose 7% to €9.1bn and this is expected to climb to €12bn in 2012, generating a double-digit operating margin.
Although it’s impossible to be precise, I estimate the group should be able to deliver €3.25bn of earnings before interest, tax, depreciation and amortisation (EBITDA) by 2015. Assuming a ten-times multiple and adjusting for net debt of €3.0bn, a €1.2bn pension deficit and discounting back at 12%, that delivers an intrinsic worth of €40 per share.
Natixis has a price target of €41.30 and quarterly results are due out on 2 May.
Recommendation: BUY at €30.86
Paul also writes share-tipping newsletter Precision Guided Investments. Call 020-7633 3634 or see moneyweek.com/PGI.