If you’ve been to a music festival or sporting event lately, the organisers were probably using power generators or air conditioning units provided by this world-leading company. But this is a very cyclical business, warns Paul Hill.
Turkey of the week: Aggreko (AGK), tipped as a BUY by The Independent
With a market share of 29% or so, Aggreko (AGK) is the world leader in the rental of power generators (61% of sales), air conditioners and dehumidifiers (12%) and oil-free compressed air (4%) systems. Its equipment is usually loaned for short periods to music festivals, sporting events, offices, factories – and even entire cities – during emergencies (such as Hurricane Katrina). Along with rental income, Aggreko also provides maintenance services, which account for around 23% of turnover.
Last week, the company reported strong first-half results and said it expects performance for the year to be “well ahead of City expectations”. First-half revenue surged 33% to £317.5m, driven by record demand from developing countries – which tend to be afflicted by blackouts or poor infrastructure. Aggreko supplies around half of Uganda’s electricity and its international power business is running at more than 90% utilisation. The big advantage for emerging nations is that a temporary power station can be established in five to ten weeks, whereas a permanent one takes five to ten years to construct. First-half 2007 earnings per share rocketed 63% to 11.6p, driven by a 3% leap in trading margins to 16%.
Lastly, the group also scored a notable coup when it was named official sponsor to the Beijing Olympics. Aggreko is now in talks with the organising committee to install all temporary power units to the games. The chief executive commented that a contract should be signed in the “not too distant future”.
These are buoyant times for Aggreko. The company is running at near-full capacity, has already doubled production at its factory in Dumbarton, and is now shipping 15 large generators each week – mainly to Africa, South America and Asia. However, investors should remember that this “feast or famine” industry was badly hit between 2002 and 2004, when it suffered from the fallout of the dotcom crash. Both Aggreko’s sales and its profits tanked owing to lower usage rates and its high operational gearing.
Obviously, if there is another global recession, Aggreko won’t escape unscathed – especially as it generates 23% of turnover in North America. The firm could be hit even harder than before as it is having to invest heavily to modernise its fleet – adding to its net debt of £224m. Finally, the rental industry is highly competitive and suffers from low barriers to entry and price elasticity. So what is the stock worth? For this type of cyclical business, where there are ongoing price pressures, I would value Aggreko on a 15 times 2007 p/e ratio – around 400p per share. So on valuation grounds, I would suggest shareholders take profits and recycle the proceeds into more attractive areas. In fact, the CEO did so last week by selling £1.3m worth of shares at 545p.
Recommendation: SELL at 530p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments