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Aggreko maintains full year guidance

Charlie Huggins | 28 April 2016 | A A A
Aggreko maintains full year guidance

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Aggreko plc 4 329/395p

Sell: 766.60 | Buy: 767.40 | Change 0.00 (0.00%)
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Performance in the first quarter has been in line with Aggreko's expectations, with the group still guiding towards a slight decline in full year underlying profit before tax. The shares rose by around 1% in early morning trading.

Underlying revenue for the first quarter was 14% behind last year at constant currency.

Rental solutions revenue was down 9% on last year, with weakness in North America (particularly from oil and gas customers) offsetting growth elsewhere.

Power Solutions Industrial revenue was 10% lower, primarily due to tough prior year comparatives which included revenues from the European Games.

Power Solutions Utility revenue was 19% lower than last year, mainly due to tough comparatives from the prior year which should ease in future periods. For example, the first quarter of 2015 included revenues from the diesel contract in Panama which ended in June 2015.

In addition Aggreko have demobilised 108MW from their 263MW of gas-fuelled plants in Mozambique, where permanent power has come on line. Year to date order intake is 486MW (14th May 2015: 388MW), including the recently announced 3 year diesel contract in Zimbabwe. The geopolitical situation remains challenging in Yemen and Venezuela.

Fleet capital expenditure is expected to be around £250 million (2015: £237 million), in line with guidance issued at the full year. This spend will focus on investment in more efficient gas and diesel engines.

Our view:

Conditions in many of Aggreko's markets remain difficult, but at least things don't seem to be getting any worse. As expected, Rental Solutions has got off to a slow start in 2016, reflecting weakness in North America. Power Solutions also had a difficult quarter, but was up against very tough comparatives, and the higher year-to-date order intake should bode well for future periods.

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.

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. 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.

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