Sell expensive Aggreko as growth slows

A slowdown in profit growth is already evident at Aggreko, with pre-tax profit down 8 per cent in 2013 and off 9 per cent in the first half of 2014. And at the time of its third-quarter trading update in November, management said it expected 2014 full-year underlying trading profit, which is due to be reported on 5 March, to be at a similar level to the previous year. Brokers expect profit to remain subdued for some time (see graph) with a number of negative factors weighing on trading. The risks for shareholders are increased by the fact that this slowdown in growth is occurring at the same time as a new management team is taking the helm.

Aggreko's EPS downturn

Source: S&P Capital IQ & *Investec Securities forecasts

Aggreko, and especially its power projects division, which sells electricity to governments and utilities, does boast an enticing long-term growth story as inadequate power infrastructure in developing countries should drive demand. However, the power projects division has recently suffered as a result of a drop off in high-margin US military work from Afghanistan and a tailing off of Japan's post-tsunami operations. Underlying revenue growth slowed during the third quarter to 10 per cent, compared with 14 per cent during the first half.

Meanwhile, growth in the group's local business, which hires out equipment for clients to operate themselves, also lagged during the third quarter of 2014. Underlying revenue was up just 4 per cent. This compares with a 10 per cent rise during the first half, which was helped by the Glasgow Commonwealth Games and the Brazil World Cup. However, half-year profits from its Asia, Pacific and Australia (APAC) business were down 53 per cent year on year. This reflected the impact of the slowdown in the mining sector on its Australian business and volume and pricing pressure in Indonesia.

And lower commodity prices could prove a drag on other parts of Aggreko's business, too. The group has significant exposure to the troubled oil and gas sector, which accounted for 15 per cent of its 2013 revenue, while petrochemical and refining contributed a further 7 per cent. This may well hold back growth in the medium term. The impact of falling commodity prices on emerging markets poses another risk to the group's revenue base. Aggreko generates around 44 per cent of its revenue from key commodity exporting continents such as Latin America, Africa and the Middle East. Falling commodity prices are likely to put pressure on government budgets in these key markets for temporary power.

Political risk is also a factor as Aggreko has contracts in Russia, Iraq and Libya. That said, in the third quarter its contract to supply 120 megawatts to Libya became operational again after being shut down for a month, which was a welcome development.