After two profit warnings in the space of a week, broker downgrades and sharp reductions in capital investment plans, the temporary power sector has blown a fuse. Shares in Aggreko (AGK) and APR Energy (APR) have slumped 9 per cent and 13 per cent respectively, and it raises the question once again of whether investors pay too much for the promise of growth.
Investment in the temporary power segment provided investors with one of the few growth opportunities in western economies crippled by anaemic growth. It was a simple enough investment case: creaking energy infrastructure in the developing world couldn't satisfy power demand as living standards improved and modern electronic devices proliferated. A compelling narrative on the face of it, but when you are paying more than 20 times forecast earnings - as is the case with Aggreko - you expect to see earnings that justify the heady valuations. As emerging markets slow down, and order books shrink, those earnings are being brought into question.
Stock market darling Aggreko was the first to issue a shock profit warning as it said increased bad debts and adverse currency movements will hit this year's numbers. Next year's prospects give even more cause for concern. Momentum in the international power projects division, responsible for over 40 per cent of revenues, is slowing. Order intake in the year to date was 870 megawatts (MW), down from 944MW at this time last year. Capital investment is set to fall sharply in the first half of next year to $150m, down from $220m this year.
APR Energy warned on profits six days later, and is showing signs that it could struggle to live up to its rating. The order book is falling, down from 9,000MW-months at the half-year results, to 8,650MW-months at the end of September. This fall, combined with continued investment in the fleet - from 1,052MW to 1,250MW over the same period - has resulted in a 20 per cent slump in revenue visibility to just 30 weeks. All this follows a late set of accounts earlier in the year and the shock exit of the finance director in September.
