Rolls-Royce seals Chinese nuclear deal

Rolls-Royce announced on Tuesday that it has an agreement in place to cooperate more closely with China's State Nuclear Power Technology Corporation (SNPTC) on civil nuclear power.

Under a new memorandum of understanding, the two entities will explore potential areas of collaboration such as engineering support, supply chain management, and control technology. China's SNPTC has in the past expressed interest in building new nuclear reactors in Britain.

China is still heavily reliant on coal for power, but Rolls-Royce, best known as a maker of jet engines, supplies instrumentation and control technology to more than 70% of the nation's nuclear reactors and emergency diesel generators to almost 40% of them, the firm said in the statement.

In a meeting of the Central Leading Group for Financial and Economic Affairs on Friday, President Xi Jinping said China should hasten its efforts to construct nuclear power projects in eastern coastal regions.

At the end of last year, nuclear power accounted for just 2.1% of the country's total energy generated, compared with 80.4% for thermal power and 15percent for hydropower.

Since the Fukushima nuclear disaster in 2011, China has reinforced safety measures at all nuclear plants, and by the end of 2013, 17 nuclear plants were operational, with a total capacity of 15,000 megawatts of electricity.

Rolls made much of its provision of "safety-critical technology and solutions for 20 years" in its statement on Tuesday.

At a meeting of the National Energy Commission in April, Premier Li Keqiang announced the construction of new nuclear power plants along the east coast.

Earlier this month, the Ministry of Environmental Protection released the environmental impact reports for two new nuclear power plants, one in southern China's Guangdong province and another in eastern China's Shandong, but much faster development is required if the nation is to meet its medium-term target of 10% of energy derived from nuclear power.

Analyst view

Rolls' shares rose 0.7% to 1,012p, defying analysts at Societe General who yesterday moved from 'hold' to 'sell' and cut their target price from 1,070p to 950p.

The company is running an investor day on Thursday which is likely to flesh out the management's thinking over the outlook for 2014 earnings, given the second-half bias to the results and the uncertainty over the group's interest in Finnish group Wärtsilä.

The analysts said they had downgraded 2015-16 earnings per share mainly to reflect the recent divestment of Energy.

"We see some risk of a further earnings downgrade given the guidance of 1/3:2/3 sales and earnings before interest and tax phasing between the first and second half this year," the note says.

"This is a major change from the more typical 45-47%:55-53% split of previous years and leaves the group a lot to do in the second half to make the guidance."

The analysts also said that "in view of management's desire to maintain a strong balance sheet, we think any potential combination with Wärtsilä would require a major equity element.

"Our simulation of a Wärtsilä acquisition based on various bid premia indicates that a hypothetical deal would be value destroying under most scenarios. It would also dilute the group's civil aerospace business which is a major attraction of the group for many investors."

The engineer said earlier in June that Emirates Airlines cancelled an order for 70 A350 aircraft worth £2.6 billion.

Rolls director Colin Smith sold 100,000 shares in mid-May, raising over £1 million.