Aggreko‘s (LSE: AGK) shares have been under quite a bit of pressure lately — they’re down 14% year to date — but a reassuring trading update this morning has them on the up today.
Although there wasn’t too much detail provided in the release, the lack of bad news was enough to cheer investors. The company’s Local business — through which it rents power generators on a smaller scale regionally — continues to demonstrate strength, particularly in North and South America where revenue was up 10% for the quarter.
The company’s more troubled Power Projects division — which provides power solutions to utilities in under-powered countries — is still lagging a bit. Revenue was down 2% and margins were weaker as major contracts in Japan (leftover from the 2011 tsunami disaster) and Afghanistan come to an end.
Slowing growth in emerging markets has reduced demand for temporary power in what until now had been a great source of business, as many of these markets face a power supply deficit and don’t have time to wait for permanent power to be built.
In the face of slowing demand, Aggreko’s management has drastically cut capital expenditure on new generators — cap ex is expected to be £230 million for the year, down from £415 million last year — and is using the extra cash flow to pay down debt. So far net debt has been reduced by £124 million, or 21%, since year-end.
Aggreko has earned a reputation as a growth share in recent years by growing its earnings by an average of 22% per year over the past five years. However, this year earnings are expected to drop 9%. Even so, the shares still trade at nearly 17 times expected earnings.
Investors need to ask themselves if they think Aggreko can regain its growth mantle or if its size, increasing competition, and emerging market struggles will mean materially slower growth for the company in coming years.
