Student View: Aggreko - Turning short-term solutions into long-term profit

Aggreko is a FTSE 100 listed company based in Glasgow and the worldwide leader in providing temporary power. It leases electrical generators, temperature control equipment (i.e. cooling towers, heating units, dehumidifiers, and air conditioners) and air compressors. Essentially, it deals with short term events and incidents, plugging the power gap where needed, and profiteering from its services handsomely. Its growth in the last three years has been nothing short of staggering; catalysed by its role in successfully providing power for high-profile events, such as to the recent London Olympic games and to Japan during and in the aftermath of its 2011 earthquake/tsunami. Aggreko as a company was spawn from the Salvesen Group in 1997 and has since entered the FTSE 100 in December 2009. Net sales are broken down by market sector into public sector (36%), events (13%), oil and gas (9%), petrochemical and refining (7%), military (7%), manufacturing industry (6%), construction (4%), services (4%), quarries and mines (3%), shipping (1%) and other (10%).

Aggreko’s incredible progress is illustrated perfectly in these two graphs below. To the right, we see Aggreko’s meteoric growth since being first listed on the FTSE 100. Yet the question remains, will Aggreko maintain such share price growth? The graph below and left begs to differ. We see here this last year’s growth, which has fluctuated massively and much to the disappointment of investors. An overall rise of around 250 pts in the last year represents a positive return for more patient investors, however twice it has lost around 400 pts in1/2 month periods, including a rather sharp fall this month.

So what has caused this latest sharp decline? Aggreko released on statement a few weeks ago saying ‘Since our last trading update in early August, however, exchange rates have moved against us, and we have also increased our bad debt provisions; we expect that, between them, these two factors will impact our anticipated profits for the year by about 2.5pc.’ Revenues in the third quarter rose by 22pc with trading supplemented by the London 2012 Olympics, the contract of which (as exclusive temporary power supplier) was worth £59m. Net debt at £685m has increased by £7m in the three months up to the end of September, mainly due to a South American acquisition and higher levels of both capital expenditure and working capital. Numis analyst Mike Murphy said the bad debt provision and capex guidance was somewhat ‘disappointing’. Despite it being a positive statement in terms of increased revenue, the shares tumbled by 7pc as a number of stumbling blocks emerged. Numis also went on to cut its rating on Aggreko from ‘buy’ to ‘hold.’ As Aggreko revealed, bad debt provisions had risen and exchange rates had moved against the company. Full-year margin predictions, however, were expected to be maintained. Another worry was that there will be lower capital expenditure on new equipment next year. Investors are concerned that slowing down the rate of fleet enlargement will in turn slow down the rate of growth.

Is this all a worry though? In 2012, the group is expecting to spend £415m overall, a significant amount of which was used on equipment used in London 2012. This needs to be reabsorbed into the wider business. When this is removed, it is likely that there will be a fall of about £40m in spending. For an asset base of about $2bn, this is a drop in the proverbial ocean!

Rupert Soames, who happens to also be the grandson of Winston Churchill, is right to be cautious about economic prospects for next year. Despite lower capital investment, he still expects to be able to meet demand because the group’s fleet of equipment is mobile. There is a global shortage of power all over the world and Aggreko is ideally positioned to take advantage over the next few years. For instance in July, India suffered the world’s largest grid failure, with half the country plunged into darkness. Africa offers a solid opportunity, as does Asia, and Aggreko remains the world’s number one operator in its field.