Aggreko's shares have been on a turbocharged run, but, as the group's growth slows, its borrowings rise and the risk of bad debts increases, they are looking exposed on a punchy rating of 20 times forecast earnings. True, Aggreko will get a one-off boost from a £50m deal to help power London's Olympics and the order book is at record levels, but, with weaker trading highlighted in the second quarter and City analysts cutting their profits forecasts, the shares look set to blow a fuse.
- Record order book
- Stock market favourite
- Growth slowing
- City analysts cutting forecasts
- Rising debt levels
- Share rating well above its average
Analysts at broker JPMorgan Cazenove say that the slowdown in Aggreko's so-called 'local' business - anything that involves supplying temporary power for one-off projects - has been "greater than expected", a reminder of the "cyclicality inherent" in the group. Responsible for 58 per cent of sales and 40 per cent of cash profits, the local business saw revenue growth (excluding currency impacts and one-off events) slow from 22 per cent in the first quarter of 2012 to just 5 per cent in the second. North America experienced the sharpest slowdown from 22 per cent in the first quarter to 2.5 per cent in the second, as demand prompted by shale-gas explorers last year was not repeated. This slowing first half follows a weaker 2011, when trading profits fell from £142m in 2010 to £121m.
Aggreko's bosses hope that the International Power Projects (IPP) division will come to the rescue. The IPP order book at the end of 2011 was at record levels, up 21 per cent on the prior period, and is equivalent to 14 months' revenue at current run rates. At the start of 2012, the IPP fleet stood at over 4,400 mega watts (MW) - to put that into perspective, Europe's largest coal-fired power station, Drax, pumps out 3,870MW. IPP is getting bigger as well; Aggreko recently increased its capital spend targets for 2012 by £50m to £415m. But this means net debt had risen from £133m at the start of 2011 to £428m by the end of March 2012. True, Aggreko returned £148m to shareholders last July. Even so, rising debt always brings higher risks for shareholders, especially in a cyclical business.
AGGREKO (AGK) | ||||
|---|---|---|---|---|
| ORD PRICE: | 2,071p | MARKET VALUE: | £5.55bn | |
| TOUCH: | 2,071-2,073p | 12-MONTH HIGH: | 2,347p | LOW: 1,519p |
| DIVIDEND YIELD: | 1.1% | PE RATIO: | 20 | |
| NET ASSET VALUE: | 330p | NET DEBT: | 41% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 0.95 | 190 | 45.8 | 10.1 |
| 2009 | 1.02 | 244 | 62.7 | 12.6 |
| 2010 | 1.23 | 304 | 79.4 | 18.9 |
| 2011 | 1.40 | 324 | 97.9 | 20.8 |
| 2012* | 1.63 | 373 | 103.5 | 22.9 |
| % change | +17 | +15 | +6 | +10 |
Normal market size: 1,250 Matched bargain trading Beta: 1.1 *JPMorgan Cazenove estimates | ||||
The IPP side is also facing headwinds because US military contracts in places such as Iraq are expected to be "materially lower in 2012", according to Aggreko; military contracts generated 11 per cent of IPP revenues, which totalled £554m in 2011, with 80 per cent coming from utilities and the balance from oil and gas, mining and manufacturing industries. And, as IPP expands into far-flung parts of the globe, it exposes Aggreko to a risk of more bad debts. That's a constant for Aggreko - in 2011 it provided for bad debt totalling 12 per cent of receivables, which, admittedly, was down from 2010's impairment rate of 15 per cent.
