Aggreko shares fall on Deutsche Bank downgrade

Aggreko’s shares fell on Monday after Deutsche Bank cut its recommendation on the stock to ‘hold’ from ‘buy’ and lowered the target price to 1,000p from 1,050p.

The supplier of temporary power generation equipment is expected to see trading profit return to growth in 2018 after a 40% decline across 2012 to 2016. Deutsche reiterated that it believes earnings will reach an inflection point in the next 12 to 18 months.

“At a 12-month forward price-earnings ratio of 16.5x, however, we believe much of this is now priced in. As such, we find it increasingly hard to argue with conviction that there is an incremental catalyst that is not priced in on a 12 month view. Hold.”

Deutsche predicts an average trading profit drop of 4% per year for fiscal years 2016 to 2017, followed by growth of 5% per year for 2018 to 2020. The bank believes a return to earnings growth in 2018 will be supportive of current valuation for longer. It also sees potential to grow dividends and make additional cash returns from 2018.

Ahead of Aggreko’s full year results on 7 March, Deutsche has forecast adjusted pre-tax profit of £221m, slightly below the consensus of £222m and management’s guidance of £225m.

“We expect the following discussion points to be in focus: 1) expectations for the Argentina standby contracts after they expire in February/March; 2) comments on the current trading environment, Power Solutions pipeline and 2017 consensus pre-tax profit which sits at £220m (Deutsche Bank forecast at £225m); 3) 2017 capital expenditure outlook (Deutsche Bank at £291m).”

On 16 January, Aggreko confirmed the Government of Argentina extended its fixed site contracts, equivalent to 174 mega watts (MW), until 31 December 2017. The FTSE 250 company said the original contracts amounted to 180MW, and initially had various expiry dates. Aggreko also confirmed that 56MW of the 270MW standby contracts was off-hired in 2016, leaving the balance at 214MW.

“We make minimal changes to earnings per share forecasts as we update our model for recent contract wins and updated Argentina assumptions post the 16 January update,” Deutsche said.

The bank has pencilled in EPS of 62.44p for 2016, up 0.4% from the previous estimate. It also upgraded its EPS forecast for 2017 by 1.3% to 63.33p and downgraded 2018 EPS by 1.6% to 67.75p.

“Risks include: the shape of Argentina profit drag, the macroeconomic environment, competition and pricing pressures, bad debts, equipment seizure and foreign exchange movements,” Deutsche concluded.

Shares fell 3.49% to 1,002p at 0913 GMT.