Aggreko stumbles: Share price slumps as analysts downgrade expectations for the struggling generator hire company

 
Lucy White
DRCONGO-ENERGY-ECONOMY
Aggreko supplies temporary power generators and is hoping to benefit from the hurricane recovery efforts in the US (Source: Getty)

Power generator hire company Aggreko has seen its share price slump this morning, as analysts slashed its target share price from 800p to 770p and downgraded its recommendation to “sell”.

Research house Berenberg said that re-ratings from other analysts, which had lifted the stock by 12 per cent since mid-August, were driven by an expected upswing in the US as Aggreko hoped to benefit from the post-hurricane rebuild efforts.

But it believed that these re-ratings were unjustified, since any cyclical recovery would just be temporary and “offset by disappointment elsewhere”.

Read more: Aggreko share price hit as it warns on profits

Berenberg also added that consensus estimates are factoring in close to 25 per cent trading profit growth in Aggreko's utility business, the power provider unit, which it believes is unrealistic.

“In fact, we believe that Aggreko will struggle to stand still in this division given firstly the slowdown in order intake year-to-date, secondly the intensification of competition, which continues to put pressure on pricing, and thirdly foreign exchange headwinds following the recent depreciation of the US dollar,” said Berenberg analyst Josh Puddle.

Glasgow-headquartered Aggreko's shares slumped 4.05 per cent in morning trading.

Read more: Aggreko chief financial officer Carole Cran resigns and will leave the power supply firm within 12 months

The company's returns have also disappointed, as return on invested capital (ROIC) has fallen from a peak of 25 per cent in the 2010 fiscal year to just 10 per cent in 2016. Berenberg expects this to shrink further to 7.6 per cent in 2017.

“The key driver behind valuation at a rental business, in our view, is ROIC,” said Puddle, who believes returns will stay depressed into next year due to a contraction in trading profits for the utility business, the £40m acquisition of loss-making Younicos, and the group's working capital position continuing to deteriorate.

Berenberg lowered its earnings per share estimates by 10 per cent for 2017 and eight per cent for 2018, and now stands eight per cent and 13 per cent respectively below a Bloomberg consensus.

Read more: Aggreko wins $40m deal to power the 2018 Winter Olympics

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