Aggreko has released full year results. Underlying Group revenue was down 3% on the prior year to £1,561m and underlying trading profit fell 14% to £270m. This impacted Group return on capital employed, which fell to 16% (2014: 19%). Nevertheless, the full year dividend was maintained at 27.12 pence per share; covered 2.6 times by earnings. The shares rose by 7% in early morning trading.
Rental Solutions revenue was in line with last year at £618m, with weakness in oil & gas and mining offsetting growth in other sectors. Underlying trading profit fell 9% to £100m.
Power Solutions revenue was down 5% and underlying trading profit fell 17% to £170m. Within this, the Industrial business grew strongly with revenues 10% higher. Power Solutions Utility revenue was down 11% (and trading profit down 28%) driven by price reductions on the Bangladesh contract extension and off-hiring of the Panama contract.
The group generated an operating cash inflow of £461 million (2014: £498 million). Debtor days increased in the Power Solutions Utility business driven by slow payments by customers in Venezuela and Yemen; the provision also increased by £10m.
Fleet capital expenditure (capex) was £237 million, broadly in line with last year with net debt coming in £5m lower at £489 million. This resulted in net debt to EBITDA of 0.9 times, in line with 2014.
Power solutions has started the year well. The Utility business has a strong order book and healthy prospect pipeline; while industrial power volumes are up on the prior year, despite soft trading conditions in some markets. However the group is cautious on the outlook for Rental Solutions, in particular the North American business, which has had a slow start to 2016.
Aggreko anticipates investing around £250 million on fleet capex in 2016, focussing on investment in more fuel efficient gas and diesel engines. Profit before tax and exceptional items is guided to be slightly lower than the prior year on a constant currency basis, in line with current market consensus.
Aggreko's guidance for 2016 is not great, but perhaps not as bad as expected. The outlook for the developed market business (Rental Solutions) has got worse, reflecting a slowdown in North America. However, the emerging market business (Power Solutions) looks to have stabilised and enters 2016 in a stronger position. The balance sheet is in decent shape and Aggreko has the flexibility to reduce capital expenditure if market conditions deteriorate further, to free up cash.
The group is currently implementing a turnaround plan designed to make the business more competitive. Costs are being cut back and part of the savings will be reinvested in technology and service. By making its equipment more energy efficient, for example, Aggreko hopes to reduce electricity costs for its customers, making it less likely they will switch to a cheaper local operator. In the near term, this extra investment will depress profitability and returns to shareholders.
The long term prospects for Aggreko still look appealing. The power shortfall in emerging markets is forecast to grow at around 6% per annum, albeit more slowly in 2015 and 2016, according to the company. Aggreko remains confident of out-growing its markets, whilst delivering margins and returns of around 20%, once conditions improve.
If emerging economies start motoring again, Aggreko could experience a surge in demand for its equipment. However, this does not look likely in the near term and conditions could still get worse before they get better. These concerns are reflected in Aggreko's valuation. The shares trade on a forward price to earnings ratio (P/E) of 13.9x, which is a c. 25% discount to the group's long run average rating.
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