Morgan Stanley upgrades Aggreko despite concerns over IPP model

Morgan Stanley upgraded power generator company Aggreko from ‘underweight’ to ‘equal weight’ and bumped up its target price from 850p to 900p, despite orders for diesel products falling.

“We retain our concerns over long-term pressures on the International power Projects (IPP) business model. However, we upgrade as the shares now trade almost two standard deviations below mid-cycle multiples, 2017 consensus estimates look supported, and we see signs that underlying trading and returns should improve in 2017,” Morgan Stanley said.

Returns are falling due to lower utilisation in diesel, contract loss,and pricing and return on capital employed (ROCE) is below its target range.

The analysts however feel returns could bounce back in 2017 due to cost savings and the recent fall in share price discounts.

If the relationship between Warstilla solutions and IPP orders holds performance can improve from current levels after orders dropped in 2015. Trading profit for 2017 also suggests consensus of £279m should be supported.

Shares have fallen by 40% since the peak in July and now trade at 10.4 times price earnings and earnings before interest tax and amortisation of 8.6 times so valuation looks fair even thought out long term structural concerns on IPP persist.

Aggreko’s share price rose 1.52% to 800.50 to 1236 GMT on Friday.