Twin tailwind to power Aggreko

Power solutions business could be 2017 surprise package
Thursday 12 Jan 2017 Author: William Cain

A recovery in the share price of temporary power provider Aggreko (AGK) may have further to run if its rivals’ share prices are anything to go by.

Shares in Ashtead (AHT) have gained 46% in the last six months versus an 18% decline at Aggreko even though close to half the latter’s business is conducted in similar North American equipment rental markets.

Aggreko great idea

The remainder of Aggreko’s business is its global Power Solutions division, in which the company provides back-up and emergency power to utilities and governments. It too has major potential catalysts ahead in 2017 and particularly 2018.

Understanding both these business units is key to our bullish stance on the stock.

North America pick-up?

In Rental Solutions Aggreko provides short-term rental of power mid-sized generators to businesses in developed markets, mainly North America.

A transactional business, the unit is susceptible to the industry’s notorious economic cyclicality.

Aggreko said conditions were tough in North America during a third quarter presentation with analysts. Revenue across the Rental Solutions business was 7% lower than a year earlier in the three months to 30 September.

But since then, markets have been bidding up the price of many pure-play equipment rental stocks in the US because of President-Elect Donald Trump’s commitment to beef up infrastructure spending.

More construction and civil engineering projects would be a major boost to market leaders like Ashtead and United Rentals. Smaller players in the US, like Aggreko, could also be poised to do well if this theme plays out.

Utilities and governments

Aggreko is best known for its global Power Solutions business and this too could also be at a key inflection point. Through this unit, Aggreko rents out large-scale generator units which plug in to government or commercial power infrastructure in the event of power shortages. Japan, for example, worked with Aggreko after its nuclear power generators were taken offline following the Fukushima nuclear accident.

Demand for this service is less economically cyclical than in Rental Solutions.

A key driver of Aggreko’s performance in Power Solutions is asset utilisation which in the second half of 20165 was approaching its highest level in four years. Asset utilisation is the percentage of assets Aggreko owns which are currently out on loan. When this figure moves into the 70% to 80% range, margins can improve dramatically.

Major sports events in 2018, at which Aggreko also often provides power, could provide a further earnings tailwind moving into next year.

A key risk to investors in Aggreko is competition from Turkey-based rival Karpowerships. It operates enormous power generating boats which can be sailed to countries with power shortages and plugged in to transmission networks.

Aggreko also operates in tough countries like Venezuela where payment for services is not always straightforward. (WC)


Aggreko (AGK) 987p

Stop loss: 790p

Market value: £2.5bn

‹ Previous2017-01-12Next ›

Important information:

These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell Youinvest.

Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.

Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.

The Shares team
Disclaimer

Advertising feature

The value of your investments can go down as well as up and you may get back less than you originally invested. We don't offer advice, so it's important you understand the risks, if you're unsure please consult a suitably qualified financial adviser. Tax treatment depends on your individual circumstances and rules may change. Past performance is not a guide to future performance and some investments need to be held for the long term.