Investment Summary
 

1.  Aggreko Plc operates in an attractive power market with an opportunity for growth.

2. The company has a competitive advantage due to its focus on its specialised sectors.

3. The Group has a hybrid integration capability of renewable as well as thermal assets.

4. The focus is on effective capital allocation approach, which is essential for its capital-intensive business.

5. Stock is currently trading at an attractive P/E multiple of 7.22x, which shows the company is undervalued at current levels as compared to industry multiple.
 

Business Overview

London Stock Exchange-traded Aggreko Plc has operational interests in providing modular, mobile power and related solutions. Its operational area of segments is divided into Power Solutions and Rental Solutions. Its focus is diversified on a range of sectors including oil and gas, petrochemicals, utilities, events, manufacturing, services, construction, mining and shipping. As on September 29, 1997, its shares were admitted to the main market of the London Stock Exchange. The Group provides power, heating and cooling in developed markets and focuses on seven key sectors. The company provides power, heating and cooling focused on seven key sectors across emerging markets for customers with generally longer-term power needs.

Key Statistics



Top Shareholders
 

(Source: Thomson Reuters)

Revenue Model


(Source: Preliminary Presentation, Company Website)

There are four main ways of revenue generation for the company. The Group generates revenue by renting its equipment items, production of the power, technical services and Fuel & Logistics.

Capital Allocation


(Source: Preliminary Presentation, Company Website)

The Group allocates its capital into four ways:
 

1. Reinvest for organic growth.

2. Sustainable dividend policy.

3. Strategic Investments.

4. Return excess capital to shareholders in the form of additional dividends and share buybacks.
 

Business Strategies


(Source: Preliminary Presentation, Company Website)

The Group’s strategy is divided into four parts:
 

1. Customer focus

The company has specialised sectors and provides specialised solutions to the targeted customers.
 

2. Technology Investment

The company invests in technology to have an upper edge over its competitors. The company uses data analytics and other technologies to configure its products.
 

3. Capital Efficiency

The Group make optimal use of its assets to reduce its costs.
 

4. Expert People

The company has expert professionals, which play a major role in the growth of the business.
 
Rental Solutions Revenue Segmentation - FY2019


(Source: Preliminary Presentation, Company Website)

The major part of the revenue in rental solutions, which is generated through Petrochemical & refining segment (19 per cent), followed by Building services & construction (18 per cent) and Oil & Gas (18 per cent).

Power Solutions Revenue Segmentation - FY2019
 

(Source: Preliminary Presentation, Company Website)

The major part of the revenue in power solutions is generated through Oil & Gas segment (41 per cent), followed by Mining (15 per cent), and Events (13 per cent).

Group’s Outlook
 

1. Profit before tax is in line with expectations.

2. The company is expecting mid-teens ROCE target for FY2020.

3. Full year fleet capex is expected to be around GBP 200-250 million.

4. The Group expected good cash generation in the fiscal year 2020.
 

Effect of Coronavirus

The Group is concerned about the welfare of its people in the current situation. The company is continuously following the development of the coronavirus outbreak and has implemented several measures to protect its people and to prepare for possible consequences of the virus. The Group is not sure about how the outbreak would develop and, therefore, the potential impact on its business. The company is following developments closely and would take further action to protect its people and business as appropriate.

Recent News

On 17^th January 2020 the company announced the appointment of Jefferies International Limited ("Jefferies") as a joint corporate broker with immediate effect. Jefferies would work with the current joint corporate broker Citigroup Global Markets Limited ("Citi"), who would remain active with the company.

Financial Highlights – Financial Year 2019


(Source: Preliminary Report, Company Website)

Strong profit growth and cash generation

In the fiscal year 2019, the company’s revenue was down by 8 per cent on the reported basis to GBP 1,613 million as compared to GBP 1,760 million in the fiscal year 2018 while on the underlying basis, it was down by 1 per cent which was in line with the expectations. Operating profit grew by 13 per cent on the underlying basis to GBP 241 million against GBP 219 million in FY2018 due to strong performance in Rental Solutions, and a significant working capital improvement. Operating profit margin on the underlying basis increased by 1.8 points to 14.9 per cent versus 12.5 per cent in FY2018. During the period, profit before tax of the company increased by 13 per cent on the underlying basis to GBP 199 million against GBP 182 million in FY2018. The Group witnessed a significant increase in its operating cash flow to GBP 628 million as compared to GBP 423 million in the fiscal year 2018.

Increase in Dividend
Final year dividend per share increased by 3 per cent to 18.3p in FY2019as compared 17.7p in FY2018. The company reported an increase of 1.1 points in ROCE on an underlying basis in the fiscal year 2019 to 11.2 per cent as compared to 10.3 per cent in FY2018.

Key Performing Indicators

In line revenue growth


(Source: Preliminary Presentation, Company Website)

The underlying revenue growth was in line with the expectations. It declined by 1 per cent in FY2019 due to challenging market conditions.

Strong operating profits margin


(Source: Preliminary Presentation, Company Website)

Operating profit margin grew to 14.9 per cent in FY2019 as compared to 12.5 per cent in the same period last year due to focus on reduction in cost.

Robust ROCE growth


(Source: Preliminary Presentation, Company Website)

In the fiscal year 2019, ROCE improves to 11.2 per cent against 10.3 per cent in the fiscal year 2018 due to the increase in underlying profit.

Improvement in LTIFR


(Source: Preliminary Presentation, Company Website)

The Group’s LTIFR improved to 0.13 in FY2019 as compared to 0.20 in FY2018 due to better safety measures taken by the company.

Financial Ratios

 

The reported EBITDA margin in FY19 was 34.30 per cent against the industry median of 13.60%. The reported operating margin was 14.90 per cent for the FY19. Net margin reported was 8 per cent for the fiscal year 2019, higher from the industry median of 4.4%. Return on equity for the same period stood at 9.50 per cent. On the liquidity front, Aggreko Plc’s current ratio stood at 1.92x. On leverage front, the debt-equity ratio of the Aggreko Plc’s was 0.49 i.e. the company is less leveraged than the industry with debt-equity ratio of 0.80.

Share Price Performance


Daily Chart as on 23^rdMarch 2020, before the market closed (Source: Thomson Reuters)

On March 23, 2020, at the time of writing (before the market close, at 8:34 AM GMT), Aggreko Plc shares were trading at GBX 340.50, down by 6.82 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 881/GBX 285.90. The group’s stock is reflecting higher volatility as against the benchmark index based on the company’s beta of 1.4196. The outstanding market capitalisation was around £934.61 million.

From the technical standpoint, 14 days-Relative Strength Index of the stock is hovering near the oversold zone, which is strengthening the upside move.

Valuation Methodology

Method 1: EV to EBITDA Approach (NTM)



To compare Aggreko Plc with its peers, EV/EBITDA multiple has been used. The peers are Catering International & Services SA (NTM EV/EBITDA was 2.27) and Maintel Holdings Plc (NTM EV/EBITDA was 3.01). The Average of EV/EBITDA (NTM) of the company’s peers was 2.64x (approx.)

Method 2: Price to Earnings Approach (NTM)



To compare Aggreko Plc with its peers, P/E multiple has been used. The peers are Ashtead Group Plc (NTM P/E was 6.90), G4S Plc (NTM P/E was 5.19), Capita Plc (NTM P/E was 3.04), Johnson Service Group Plc (NTM P/E was 9.67) and Catering International & Services SA (NTM P/E was 7.86). The average of P/E (NTM) of the company’s peers was 6.53x (approx.)

Valuation Metrics


(Source: LSE)

As on 28^th February 2020, the Price to Earnings ratio of the Aggreko Plc’s was around 13.9xwhich was lower as compared with the industry. It reflects that the company is underpriced than the respective industry. The company’s EV/EBITDA multiple is 4.7x, which was lower as compared with the industry, and shows that the company is underpriced than the industry.

 

(Source: LSE)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE.

Dividend Yield


(Source: Thomson Reuters)

Aggreko Plc has a dividend yield of 7.58 per cent which is higher than the industry dividend yield of 3.18 per cent and the sector dividend yield of 4.65 per cent.

Growth and Risk Assessments

There are certain principal risks associated with the company’s business which could affect the overall performance of the Group. Global macroeconomic uncertainty, failure to identify, develop and deploy new technology could hinder growth. Climate change could affect the business. A cyber security incident could lead to a loss of data integrity or disruption to operations. Failure to deliver critical contracts effectively and significant customer payment default or impounding of assets could affect the revenue and profitability of the company. However, the Group’s underlying performance during 2019 provides confidence in the business growth trajectory. The Tokyo 2020 Olympic and Paralympic Games could trigger its growth performance and enhance its business in the near term. The company is focusing on its working capital and would continue its capital expenditure discipline with expected fleet capital expenditure of around £200-£250 million.

Conclusion

In the fiscal year 2019, the company delivers a decent financial performance. It delivered underlying profit growth of 13% due to strong performance in Rental Solutions. The company witnessed a significant improvement in its working capital.  The Group has increased its final dividend by 3 per cent which shows the Group is confident about its growth and sustainability of its performance.  The company is well-positioned to meet its customers' evolving needs in the changing energy market. Growing interest in lower-carbon technology and its new battery storage product could enhance its growth rate and would benefit the company in the long term. The Group’s prospects are looking good, and it could be an opportunity for the investors to invest in this company at the current attractive stock price levels.

Based on decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 336 (as on 23rd March 2020 at 8:32 AM GMT), with lower double digit upside potential, based on 2.64x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.) and 6.53x NTM P/E (approx.) on FY20E earnings per share (approx.).
 
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.