When seeking the best UK stock to invest in, I’m really looking for three things.
One, a highly profitable business.
Two, a a brilliant track record in creating value for shareholders.
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Three, a large future market for growth.
Naturally, my research threw up the most profitable UK stock on the market today. It has net profit margins this year of more than 98%. How is this possible?
Power metal
This is Yellow Cake (LSE:YCA). Does the name of the company sound familiar? You may have been paying attention in school chemistry lessons.
The business is set up to buy and hold yellowcake uranium. That’s a compound used in the preparation of uranium to power nuclear reactors. By holding Yellow Cake shares, investors get exposure to the price of uranium.
Has this strategy it been profitable over time? Yes, and then some. Yellow Cake posted its first full year of profit in 2019, raking in $29.7m.
Chief executive Andre Liebenberg said at the time that uranium markets were “structurally mispriced”. Prices would “continue to rise in the long term”, he suggested.
In 2020, the company arranged a deal to buy 1.35 million pounds of uranium as part of a 10-year deal with Kazatomprom in Canada. It paid $48.90 per pound.
With the market price of yellowcake now sitting around $70, that’s a tidy return on investment. So there’s the shareholder value. Most notably, Yellow Cake has an extremely high return on equity. At 43%, it’s around triple the average UK stock.
How big can it be?
Yellow Cake only trades this commodity, rather than acting as a mining explorer or refiner so its overheads are low. Hence the large profit margins.
So what of the addressable market?
Uranium prices were heavily suppressed in the early 2010s, especially in the wake of the Fukushima disaster. That nuclear disaster saw 50 Japanese reactors taken offline. But more recently, prices for the industrial fuel have been soaring.
Right now, China is making a huge drive to snap up uranium supplies. That, amid a global rush to secure nuclear fuel, has pushed prices up to a 15-year high.
Governments worldwide are constantly seeking low-carbon energy generation to meet net-zero targets.
And nuclear fuel is still the most efficient type. A single pound of uranium can produce as much energy as 3m pounds of coal.
In tandem the Yellow Cake share price has rallied 54% in 2023. The company suggests its net asset value — that is, the value of all of the uranium it holds — is $1.8bn (£1.43bn).
With a market cap of £1.3bn, that means Yellow Cake is currently valued £130m less than all the saleable assets it holds. I’d say that makes for an intriguing value prospect.
Most profitable
A uranium investment vehicle is an adventurous play for any investor. Risks include falling demand for nuclear fuel, which would crush Yellow Cake’s value. Another damaging nuclear disaster could persuade governments to search elsewhere for low-carbon fuels.
For the moment, Yellow Cake holds just over 20m pounds of yellowcake uranium. That’s equivalent to 20% of global supply. To me, that makes this business structurally important.
And with the long-term scale back of fossil fuels, I’d say nuclear power isn’t going anywhere.
